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STOCK PRICES 

FACTORS IN THEIR RISE AND FALL 



II,I,USTRATED WITH CHARTS 



BY 

FREDERIC DREW BOND / 



VOLUME VI OF "THE INVESTOR'S LIBRARY" 
OTHER VOLUMES OF THIS LIBRARY ARE: 

ART OF WAI,I< STREET INVESTING CYCI^ES OF SPECUI^ATION 

PITFAI,I,S OF SPECUI.ATION INVESTOR'S PRIMER 

MINING INVESTMENTS AND HOW TO JUDGE THEM 



NEW YORK 

MOODY'S MAGAZINE BOOK DEPT- 
1911 



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Copyri*ght, 1911, by 
A. W. FERRIN 



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CONTENTS 

Chapter Page 
I— THE DISTRIBUTION OF SECURITIES 1 

Stocks and Bonds — T\"hat They Represent — Investment vs. 
Speculation — How Stocks are Floated and How Sold on 
the Exchangres — The New York Stock Exchange ; Methods 
of Trading- There — Investment Stocks — Ratio of Invest- 
ment to Speculative Transactions — Marginal Trading. 

II— FACTORS OF SHARE PRICES 17 

The Mental Factor — Prices the Resultant of the Interac- 
tion of the Hopes and Fears of All Traders — The Relation 
of Speculators to the Banks — The Actual Distribution of 
Stocks at a Given Time. 

Ill— THE TREND OF THE MARKET 23 

Varieties of Traders — Who Makes the Trend? — What the 
Tape Shows — Anticipating the Long Sw;ings — Funda- 
mental Indications — Investment Buying — Advantages of 
the "insiders." 

IV— THE PRIORITY OF STOCK PRICES 34 

How the Stock Market Discounts the Future — Bank Clear- 
ings as an Index of Business Prosperity or Depression — 
The Significance of Railway Gross Earnings — Signs in 
the Action of Stock Prices Themselves. 

V— THE BANKS AND THE STOCK EXCHANGE 45 

Bank Loans — Their Relation to Deposits — Why an Excess 
of Loans Is Undesirable — Commercial and Collateral 
Loans — How the Banks Assist the Rise and Fall of Prices 
— The Prophetic Surplus Reserve — Call Loan, Time Loan 
and Commercial Paper Rates Compared — Significance of 
Their Interrelation. 

VI— THE FLOATING SUPPLY 68 

Bearing on Prices of Amount of Stock Not Permanently 
Lodged — Typical Illustrations — What Stocks Are Most 
Easily Marked Up and Down — Speculative Favorites. 

VII— MANIPULATION 77 

Importance of Manipulation Exaggerated — Its Purpose — 
How the Big Pools Operate — tDepressing Stocks for Accu- 
mulation — Interesting the Public — Indications of Manipu- 
lation — Manipulation in Unlisted Stocks. 

VIII— RISING AND FALLING MARKETS 86 

The Great Swings — Secondary and Tertiary Movements — 
The Peculiarities of Bull and Bear Markets — Relative 
Length and Extent — The Function of Short Selling — 
Recent Big Movements Analyzed. 

IX— THE DISTRIBUTION OF PROFIT AND LOSS IN THE 

MARKET 100 

Short Selling Further Explained — Possibilities of Gains 
of Bears and Bulls — What 500 Actual Trading Accounts 
Show — Percentage of Profitable Transactions — Profits of 
Successful Traders Compared with Profits In Commer- 
cial Lines — Size of Margins Necessary. 

X— THE PSYCHOLOGY OF SPECULATION 117 

Temperament of the Trader Important Factor — Who 
Should Speculate and Who Should Not — Speculation 
Should Not be Regarded as a "Gamble" — Study of Meth- 
ods, Conditions and Values Necessary — Caution as Requi- 
site as in Any Business — The Value of Experience — Tests 



I. 

The Distribution of Securities 

THE stock of a corporation is its ownership; its 
bonds are the evidence of its funded debt. Usual- 
ly, for business purposes, the stock of a company 
is represented by certificates, each of one or more of the 
shares into which the stock as a whole is divided. All 
the shares of a company's stock thus represent the whole 
ownership, and each share represents such part of the 
ownership as it is part of the whole number of shares. 

Shares of stock sell without entailing liability on the 
purchaser beyond such as is involved in a possible decline 
in price. The advantages in the power to transfer any 
part of the ownership of a concern without necessarily 
interfering with the conduct of the business and without 
the purchaser assuming risk beyond an impairment of 
the worth of his purchase money, are the chief causes of 
the strong disposition, in the last two decades, to prefer 
the corporate form of business to the older partnership 
form. 

Formerly, a business man owned one concern or a cer- 
tain share of it as a partner ; occasionally, he might have 
interests in another property, but even this was rather 
rare. At the present time, the ability to buy and sell the 
stock of a corporation in small parcels has distributed the 
ownership of these companies among very many holders. 



2 STOCK PRICES. 

There is now probably not a steam road of importance 
whose stockholders do not number well into the hun- 
dreds, while in the case of the great railways the owners 
are to be counted by the thousands till they reach their 
maximum in the number of the Pennsylvania Railroad 
stockholders, over 55,000 in December, 1909. Not only 
is one concern owned by many persons, but, conversely, 
many persons may each own a small parcel of very many 
concerns. In this way a community of business interests 
arises, which reaches its apex in the case of great capital- 
ists with interlocked holdings in very many huge cor- 
porations. 

Shares are often of two sorts : preferred and common. 
Shares of preferred stock have usually a limited claim on 
the yearly earnings of a corporation prior to the claims 
of the common stock. In the event of the company's 
liquidation, preferred stock has, also, very often, prefer- 
ence as to the assets. Common stockholders, as a rule, 
get whatever earnings may be distributed as dividends 
after the preferred shareholders have received their lim- 
ited but prior distribution. When there is but one class 
of stock it has, of course, all the rights of ownership. 

Since the days of early railroading, it has been the 
custom in America to let the nominal, or par, value of 
bonds and preferred stock represent roughly the valua- 
tion of a corporation, or, sometimes, the actual capital 
invested at its start. In this way, the common stock 
means merely the business possibilities of the concern at 
its inception. When a company is successful, the common 
stockholders receive ultimately the lion's share of the 



DISTRIBUTION OF SECURITIES. 3 

profits, but if the concern fails such stock is not infre- 
quently totally valueless. This method of capitalizing 
has been objected to on the ground that the nominal, or 
par, valuation (usually $100) of a share gives the im- 
pression of a real value, which does not exist, and that 
the pressure which the desire to earn dividends on a mass 
of overrated shares exercises on managers leads to det- 
rimental business practices. Stock, whether common or 
not, which, in this manner, has, at the outset of a con- 
cern, little or no actual equity in the assets and earnings 
has been termed ^'watered stock.'' But the price paid for 
such shares by any buyer represents his estimate of the 
business possibilities they connote, and is not based on 
the nominal value of the share or on the number of 
shares issued. Of course, the nominal capitalization 
should not exceed the value of the actual condition into 
which, in the end, it is believed these possibilities will 
issue. The shares of Adams Express Company and of 
some other concerns have no nominal valuation, but rep- 
resent, each, a certain percentage of the whole stock; 
such shares sell at about $100 apiece whenever the num- 
ber of dollars received on each, yearly, as a dividend, is 
regarded as a fair percentage return on its class of 
business. 

In commerce the things dealt with are concrete. Com- 
modities have value in exchange because of their value in 
use to the last purchaser, or consumer ; they are produced 
to satisfy a want and used up in its satisfaction. But the 
use of stock, on which its value in exchange depends, is 
simply to increase or conserve wealth by affording an in- 



4 STOCK PRICES. 

come to a holder or through a change in price. Strictly 
speaking, stock, or ownership, can be neither produced, 
in an economic sense, nor consumed ; it is a business re- 
lation which appears and disappears in accordance with 
other business facts and relations. 

Holders of stocks are investors and speculators. A 
desire to avoid the latter term has led to a tendency to 
make the word 'investor" cover more than it rightly 
should. An investor is one who buys a bond for its in- 
come or stock for its dividends. A speculator buys or 
sells in hope of a change in price which will redound to 
his advantage. The difference between investor and 
speculator is thus one of intention, not of outward fact. 
An investor may change his mind about shares purchased 
for dividends and sell them at a speculative gain. Con- 
versely, a speculator buying in hope of a rise in price 
may determine to hold the stock bought, permanently for 
the sake of its dividends. The only usual outward dif- 
ference between the two sorts of purchasers is that an 
investor, as a rule, holds his stock very much longer than 
a speculator does his, and that operations for a fall in 
prices are always speculative. The element of difference 
in length of holding as well as the different motives actu- 
ating the two sorts of buyers renders the distinction one 
which clarifies discussion. Between speculation and 
gambling, the common element of uncertainty and the 
frequent similarity of the motives of the participants have 
caused some confusion. Gambling, however, "consists 
in placing money on artificially-created risks of some for- 
tuitous event, speculation consists in assuming the inevi- 



DISTRIBUTION OF SECURITIES. i 

table economic risks of changes in value/' Gambling is 
always betting : speculation, no matter what the intention 
of the trader may be, always vests in him the rights and 
duties of a property owner. 

A corporation may offer its stock for sale in part or in 
whole ; or, the shares may be sold privately or on the ex- 
changes. Stock sold in the first instance directly by a 
corporation is afterwards subject to sale, usually through 
private transaction or on the exchanges only. The stock 
exchanges of the different cities — which are organiza- 
tions, sometimes incorporated, sometimes, like the New 
York Stock Exchange, having the status of a private 
club — are limited to a certain number of members who 
assemble together at certain hours each day and execute 
with one another orders of customers to buy and sell 
stocks and bonds. The stocks traded in on each exchange 
are limited to those formally admitted to such privilege. 
Nearly every large city in America has a stock exchange 
of more or less local prominence, but those of Boston and 
New York only stand in the first rank. Boston is the 
centre of trading in the mining stocks of the country, 
particularly those of copper ; New York in the railroads 
and industrials. As the two latter classes of business are 
much the more extensive of the three sorts, the New 
York Stock Exchange is, by far, the most important in 
the country. 

On the New York Stock Exchange the number of 
brokers is limited to i,ioo. Many members are con- 
nected with firms in which there are other partners, not 
members of the Exchange. Besides the New York City 



6 STOCK PRICES. 

offices, there are branch offices of Exchange firms in all 
of the important Eastern cities and in not a few of the 
Western. Probably several hundred members of the 
Exchange, known as "room traders," are engaged in the 
business of speculation for themselves alone. The ma- 
jority of these room traders are "scalpers"; that is, they 
buy and sell stocks for their own account and then close 
the transaction the same day whether it shows a loss or a 
gain. In this way, they rarely have commitments open 
overnight. It may be added that some of the stocks trad- 
ed in on the New York Stock Exchange are bought and 
sold on other exchanges, also. 

On the New York Stock Exchange, the dealings are 
ordinarily in loo share lots or simple multiples of such 
amount. Many brokers refuse to buy a smaller number 
of shares unless they are to be paid for in full at once 
and taken off the market. Stock bought for speculation 
is usually purchased with the aid of the broker's re- 
sources, the customer depositing a sum, called his "mar- 
gin," equal to so many "points" (or dollars a share) on 
the purchase price of the stock; the certificates purchased 
are retained as a pledge by the broker and are generally 
repledged by him at his bank. When the price of stocks 
bought on margin declines below the number of points 
covered by the margin, the shares pledged with the 
broker are either sold by him to ensure himself against 
loss or, further margin is obtained from the customer. 

It is customary on the exchanges to trade not only for 
a rise in stock prices, but for a fall. A trader who be- 
lieves that a stock is selling too high and who thinks the 



DISTRIBUTIOX OF SECURITIES. 7 

price will decline, may "sell short" shares of that security. 
In doing this through a broker, the latter contracts to de- 
liver the shares in question to a purchaser before a fixed 
time, generally the usual time for stock deliveries, or a 
quarter past two the afternoon of the next full business 
day. He then borrows the stock of some owner, putting 
up against it, as security, the full amount, in cash, of its 
selling price. The stock so borrowed is then delivered 
at the appointed time to its purchaser. This completes 
the first part of a short sale. When it is wished to close 
the operation, the broker buys in the same amount of 
shares as he had previously sold short and delivers them 
to the person of whom he had borrowed them, receiving 
back his security money, usually with interest. The price 
between which the broker sold the borrowed shares short, 
and the price at which he bought them back to reUr 
them to the lender shows whether a gain or a loss ha . 
been made by the'transaction. If the shares have fallen 
in pri^e, the short seller makes the difference between 
the higher price at which he sold them short and the 
lower price at which he bought them back for their lend- 
er; if the price rises, he loses the difference between the 
lower price at which he sold them short and the higher 
price at which he was obliged to re-purchase them. When 
a customer engages in this transaction the usual margin 
is still required by the broker, because, if the shares go 
up in price, the lender may demand them back, and the 
broker be forced to buy them in at the higher price, at 
a loss to himself unless protected by margin of his cus- 
tomer. 



8 STOCK PRICES. 

The advance of funds by the broker against the pledge 
of shares is simply the extension to speculative opera- 
tions of the principle of credit. It enables the purchaser 
to take larger risks and obtain, if successful, greater 
gains than his own capital would allow him to do ; in do- 
ing this, it ofifers, also, speculative chances to many who. 
otherw^ise, would be unable to enter into commitments of 
sufficient size to warrant the making. In a marginal 
market the commitments are, therefore, much more ex- 
tensive than in a market void of this sort of speculation. 
How much larger is difficult to estimate exactly. As 
$100, or par, is probably about a fair average price of the 
shares sold on the Exchange from year to year, and as 
one-tenth of this sum, or $io a share, is the usual margin 
required, it might be hazarded that the trading in a mar* 
ket such as the New York Stock Exchange, were there 
no marginal dealings, would be but one-tenth in amount 
of what it now is. But, probably, it would be much less, 
as many traders would not deal speculatively at all if 
their possible profits were divided by ten, and they, them- 
selves, forced to pay in full on all their commitments. 
In any event, the transactions in a market where mar- 
ginal trading obtains are very much more frequent than 
in a market of similar size for the same stocks but de- 
void of this species of trading. 

Stocks which for years pay good dividends go more 
and more into permanent investment hands. Pennsyl- 
vania Railroad stock, which has never failed to receive a 
dividend of some size since the beginning of the com- 
pany, has its 317 millions of dollars of shares owned by 



DISTRIBUTIOX OF SECURITIES. 9 

over 55,000 registered holders ; while Union Pacific com- 
mon, though paying 10 per cent dividends against Penn- 
sylvania's 6 per cent, has its 214 millions of dollars of 
shares held by but 10,000 registered holders. (Decem- 
ber, 1909). Generally speaking, the better thought-of 
a stock, the greater the number of its registered holders 
and the less the amount of the average holding of each. 
The Journal of Commerce of New York City has for 
some years past compiled annually a list of the regis- 
tered holders of the great corporations, its information 
being furnished directly by such concerns as are willing 
to afford publicity to their figures. From these statistics 
it appears that the average number of shares, at the close 
of 1909, of Pennsylvania stockholders is about 60; of 
Lackawanna, 180; of Delaware and Hudson, 70; of New 
York Central, no. On the other hand, a speculative 
stock like Union Pacific has average holdings of about 
200 shares; Southern Pacific, 240; Southern Railway, 
300, and Reading, nearly 700 (par $50 in this case). As 
the stocks, with the large average holdings, are the specu- 
lative leaders, and as those with the smaller average hold- 
ings are the ones thought best of by investors, it is evi- 
dent that the better a stock is thought-of by investors the 
smaller become its average holdings as the number of 
share owners increases. 

When shares are bought by investors and taken oflf the 
market, almost invariably they are registered on the 
transfer books of the company in the investor's name and 
a new certificate is issued to him. He wants the certifi- 
cate in his own name, both as a token of ownership and so 



10 STOCK PRICES. 

that the dividends paid will come to him directly instead 
of going first to some previous owner, in whose name the 
shares stood before purchased by the investor in question. 
But, when stock is bought for speculation, "on margin,'' 
a transfer on the company's books is infrequent. Let us 
suppose that shares have been sold by Jones in whose 
name they are registered. Smith, the customer of a brok- 
erage firm, buys in these shares for speculative purposes 
through his broker. Jones' signature on the back of the 
certificate has been witnessed by his broker and the shares 
thereby made a ''good delivery.'' In this condition they 
are received by Smith's broker. But Smith has no in- 
tention of keeping these shares. Soon he sells them. The 
speculator buying them of him, also, holds them but a 
short time before he sells. In this way the shares are 
handec^ successively from one broker to another, each of 
whom executes speculative orders in connection with 
them for his own customer. All the time, the certificates 
are in the physical possession, not of anyone of the spec- 
ulators, but of either a broker or a bank at which the 
broker pledges them as security for loans. If the shares 
are ''cleared" — ^that is, if the purchases and sales are off- 
set against each other through a "clearing house," the ac- 
tual certificates may pass into the hands of a brokerage 
house which has nothing at all to do with their particular 
purchase or sale but which received them in settlement, 
in part or in whole, of its own dealings in the shares of 
that stock. But, in any event, whether the shares are 
"cleared" or not, they may during all this period stand 
in the name of Jones, their first, registered owner. But, 



DISTRIBUTIOX OF SECURITIES. ii 

it is more probable that they will soon be transferred, 
for convenience, into the name of some broker, and in 
this shape undergo their successive passages from hand 
to hand. In this way, the great bulk of the stock floating 
around Wall Street stands in the name of a member of 
the New York Stock Exchange. Unless the stock is 
bought by an investor, a transfer, afterwards, on cor- 
poration books will be made simply for the sake of get- 
ting the dividends directly from the corporation instead 
of having the trouble of applying to the broker in whose 
name the shares stand. 

It thus appears that while all investment stock, the 
country over, is transferred almost invariably on the cor- 
poration books, speculative stock is thus registered very 
infrequently and usually only for convenience in obtain- 
ing dividends. Thus, the number of shares transferred 
during the year on the books of a company will neces- 
sarily be greater than the number of investment trades, 
because a certain indefinite number of shares carried 
speculatively on margin will also be transferred. Now, 
if the great corporations published the number of shares 
registered by them year by year, it would be easy in any 
instance to state at least the maximum relation between 
the amount of investment and the amount of the total 
dealings, by simply comparing the amount of stock reg- 
istered with all the stock sold during the year. The 
figure arrived at would be too high because some of the 
registered stock, as already said, is for speculation ; but 
it would be still near the exact facts. By comparing the 
Journal of Commerce figures from year to year with the 



12 STOCK PRICES. 

average stockholdings in that sort of business, the coun- 
try over, and with the quantity of shares sold on the New 
York Stock Exchange, a close approximation in the mat- 
ter can still be arrived at. 

For example, during 1909 the registered stockholders 
of Reading common decreased 750 in number. That 
same year, general railroad stockholdings all over the 
country averaged about 150 shares per holder. Reading 
shares being **half shares" (par, $50 instead of $100), it 
IS easy to see that probably a quarter of a million shares 
(750 X 150 X 2) of the stock sold all over the country, 
were that year transferred on the company's books. 

But, during 1909, no less than 28 million shares of 
Reading common were sold on the New York Stock Ex- 
change alone. In other words, the investment dealings 
in this stock all over America must have been less than 
I per cent (250,000 divided by 28,000,000) of the total 
transactions in the stocks on the New York Stock Ex- 
change. 

In this calculation the number 150 as the total average 
amount of stockholdings in all the important roads is 
obtained by dividing the capitalization of all these roads 
by the number of registered stockholders they report. 
Reading's own average is several times greater (350 
shares), but as a large amount of the stock is held for 
purposes of control it seems fairer to take the average 
holdings in all roads. To the calculation itself, the only 
objection that can be made is that the figure represent- 
ing the decrease, 750, is necessarily a net figure and that 
it may simply represent the remainder of a large number 



DISTRIBUTION OF SECURITIES. 13 

of increases and decreases. But this is not quite so ; dur- 
ing that year the stockholdings in nearly all the roads 
decreased, and moreover, such inaccuracy as necessarily 
exists in the matter is probably more than offset by the fact 
that this figure includes decreases arising from registra- 
tions of speculative stock. A broker, for instance, com- 
ing into possession of ten ''odd lots'' of shares aggregat- 
ing 100 shares, will have them tranferred into a single 
looshare certificate, this amount being the unit of trad- 
ing on the exchange. 

To test the correctness of this mode of estimating, let 
us apply the same method to Pennsylvania, Atchison and 
Union Pacific. Pennsylvania stockholdings in 1909 de- 
creased about 3,500. The same year the sales on the 
New York Stock Exchange were nearly 6 millions. Per- 
forming the calculation as before, we get (150 X 3,500 X 
2 divided by 6,000,000) 17^ per cent as result. It is 
worth notice that, whereas, if instead of the figure of 
150, the Reading's own average stockholdings were used 
our result in that case w^ould be several times larger— in 
the case of the Pennsylvania, that road's own average 
holdings, about 60 shares, would greatly reduce the pro- 
portion shown of investment to speculative dealings. 
Reading, it may be added, is the most speculative great 
railroad stock on the exchange and Pennsylvania the 
most favored by investors, so these two extremes of i 
per cent and 173^ per cent correspond with the trend of 
facts. Proceeding similarly with Union Pacific and 
Atchison, we obtain in the former case (4,000 X 150 di- 
vided by 21,000,000) nearly 3 per cent, and in the lattei* 



14 STOCK PRICES. 

case (700 X 150 divided by 5,500,000) about 2 per cent — 
as representing the percentage of investment dealings 
everywhere to speculative dealings on the New York 
Stock Exchange. It should be observed that the par of 
both these stocks is $100, so that the number of shares 
in these two last calculations does not need to be multi- 
plied by two, as in the case of Reading and Pennsylvania. 
Also, that, in all the calculations, an investment deal is 
assumed to be one in which at least one of the parties 
is an investor. No attempt has been made to distinguish 
the case where investor sells to investor, separately. 

These percentages are estimates. In some instances 
they may be too high, in others too low. But taking them 
all in all, noticing how generally consistently they work 
out, it is a fair conclusion that on the New York Stock 
Exchange, the total of investment dealings, at least in the 
great railway securities, is considerably below 5 per cent 
of the total transactions. 

■, It might be expected that the multitude of transactions 
on the New York Stock Exchange would ensure sales at 
every allowable figure between the upper and lower 
prices of the day. An inspection of the daily sales list 
(published, for instance, in the New York Evening Sun) 
shows this to be so. Stocks frequently traded in are sold 
at every eighth of a dollar fluctuation between the high- 
est and lowest prices of the day, and would be sold at 
even closer differences did the Exchange permit sales at 
prices involving sums of less than an even eighth of a 
dollar a share. A stock like Union Pacific will move by 
eighths of a dollar a share on every trading day, unless 



DISTRIBUTIOX OF SECURITIES. !.«; 

in the event of a sudden panic or of some other unusual 
and potent market influence ; while shares of a much less 
active stock, such as Wabash, may be sold a few times 
during the day's session at diflferences between each sale 
of a quarter of a dollar a share, a half or more. Lastly, 
the inactive stocks — often largely confined to investment 
dealings — are often without any sales on many days and 
frequently vary from transaction to transaction by sev- 
eral dollars a share. The greater the amount of specu- 
lative trading, the greater the activity in a stock; and 
the greater the activity, the more continuous its price 
range; the less active, the more disjointed this range, 
^larginal trading thus aflfords not only an instant mar- 
ket for stocks, but a market of minimum diflference be- 
tween successive sales. 

Without stock speculation, investment dealings in 
stocks would take on the same character as purchases 
and sales of a partnership in a firm. The relatively very 
small amount of investment buying at one time compared 
with the amount of speculative, shows how few shares 
Avould be bought at the outset of a company if they had 
to be taken on the basis of the dividend returns now cus- 
tomary. It is the speculator who, in consideration of the 
chance of profit, is willing to take the burden and the 
risk at the inception of an enterprise. To dispose of the 
stock of a new railroad or industrial company to the 
"public" without the intermediation of speculators, re- 
turns analogous to those oflfered by partnerships would 
have to be paid as dividends to attract sufficient buyers 
to the spot. Only in the course of years does a stock 



i6 STOCK PRICES. 

pass slowly into permanent investment hands, after it 
has long paid good dividends and has become valued not 
only for these dividends themselves, but for the certainty 
of their return. Indeed, shares disposed of to investors 
•by new corporations not listed on the Exchanges, are 
readily sold only when large dividends are paid at the 
very start, or when emphatic statements (whether true 
or false) that such will be paid are made and believed. 
But large dividends in the case of great corporations 
would mean much smaller capitalizations, and, in par- 
ticular, the extinguishment of the peculiar speculative 
position so often held in American finance by common 
shares. 



II 

Factors of Shar« Prices 

A speculator wishes to make as much money as he 
can; an investor, to get as large an income as pos- 
sible. The dealings of each in the stock market are 
a reflection of their wishes. But both wish, also, to 
avoid loss ; hence another motive impelling them to 
action. On the beliefs of speculators and investors, 
therefore, and on their consequent hopes and fears 
depend the prices paid for stocks and the stocks 
bought and sold. As this is true of everyone in the 
market, it follows that prices are but the resultant of 
the interaction of the hopes and fears of all traders. 
As the late Walter Bagehot put it, in the stock market, 
and there only, does the ''economic man" of political 
economy, actuated solely by the desire for gain, cease 
to be a convenient fiction and become a reality. 

To say that nothing afifects stock prices save through 
the minds of buyers and sellers might seem a mere 
platitude, but, as a matter of fact, it is common to 
hear a rise in the rate of interest, the defeat of a nation 
in war, an earthquake or some other notable event 
ascribed as a cause of stock movements; the seeming 
implication being, often, that in some vague way these 
facts do, of themselves, make the prices. In a sense, 
indeed, such statements, as well as the metaphor which 

17 



i8 STOCK PRICES 

speaks of the stock market as the "barometer of busi- 
ness/' are convenient shorthand expressions, but, in 
another sense, they are not infrequently the token of 
a confusion of thought. A puzzling feature of the 
market to many is its occasional opposite response at 
different times to the same sort of business happen- 
ings; thus, in December, 1905, the steadiness of quo- 
tations in the face of call money rates of extreme 
stiffness was a source of excessive perplexity to those 
aware of the singularity of the fact but who failed to 
note that it is not an event itself but its influence in 
affecting the acts of the market participants which 
determines the course of prices. The knowledge of an 
occurrence and the feelings which it singly awakens, 
mingle with a host of other ideas and feelings in each 
trader and modify the resultant of their interactions. 
It is this mental factor which judges that railroad 
shares are better investments than industrial, though, 
in certain respects, the justness of this inference may 
be open to challenge. Dividend paying stocks sell 
ordinarily at about prices which net the purchaser not 
so far from the current interest rates for money ex- 
pected on the security they offer. Stocks guaranteed 
by high-grade companies and those which have come 
to be held entirely by investors, or almost so, pay a 
return on the purchase price little, if at all, higher 
than that derived from a first-class bond or mortgage 
or from the highest sort of commercial discounts. 
Railway stocks paying dividends of from 4 to 7 per 
cent are expected in good times to net the investor 



FACTORS OF SHARE PRICES ig 

from about 4>^ to 6 per cent, while from 6 to 8 per 
cent return is generally looked for from industrial 
shares paying dividends of from 5 to 10 per cent. The 
ease of investment and the absence of personal lia- 
bility make dividend paying shares on the great 
exchanges a receptacle for the spare funds of the 
community in exactly the same w^ay as real estate, 
mortgages, bonds and deposit accounts. 

For these reasons, no matter how 'Svatered'' the 
stock of a company may be at its outset, if it comes 
to pay dividends at about the rate expected in its class 
of corporate business, and if its earnings seem likely 
to enable it to continue such disbursements straight 
on, the share price will approximate toward par, and 
the stock, as time goes on, will become more and more 
absorbed by investors, the extent of such absorption 
depending largely on the quantity of stock outstand- 
ing. The history of the common stock of the United 
States Steel Corporation furnishes a good example of 
this state of things. 

The investment valuation of a share by its security, 
its dividend rate and its absence of attached liability, 
offer the explanation of a fact which has puzzled 
many. It has been observed that a responsible trading 
company which, if sold outright to another merchant 
or merchants, would be expected to return, say, about 
25 per cent yearly on the investment, when converted 
into a corporation, can be sold on an exchange or dis- 
posed of through other means of wide publicity, in 
blocks of shareS; at terms which net the buyers often 



20 STOCK PRICES 

less than 8 or lo per cent annually, and which mean 
for the former partners very much greater sums than 
they would have been at all likely to obtain by sale of 
the concern while a partnership. Some years ago the 
large department store of Lit Brothers, in Philadel- 
phia, incorporated and offered a trifle less than half 
the capital stock at about par, the size of the capitali- 
zation ($2,500,000) being fixed so that at least 7 per 
cent dividends could be paid. The shares were readily 
absorbed on these terms, and have paid 10 per cent 
yearly from the start. It may safely be said that had 
half the partnership been sold to one or more pur- 
chasers without incorporation, such a price would have 
been wholly unattainable. Good stocks are not bought 
by investors to return partnership profits, but as places 
for the deposit and for income growth of funds. 

But though the price of shares has a general con- 
nection with the income afforded, or expected soon to 
be afforded, yet, even in the case of excellent stocks, 
this connection is usually only general. The prices of 
stocks may fluctuate around a central figure, upwards 
and downwards, with no change whatever in the divi- 
dend rate or any likelihood of any, and with frequently 
no discernible alteration of moment in the business 
standing and prospects of the corporation. Pennsyl- 
vania, whose par is $50, may sell one day at $65 a share, 
or 130 points on the New York Exchange, which 
counts by percentage of par; the next month at $70 a 
share, or 140 points, though, meanwhile, the business 
[has not changed in value, From year to year prices 



FACTORS OF SHARE PRICES 21 

of stocks in the premier rank on the Exchange vary 
$15, $20, $25 and more between high and low prices, 
while shares of less established value fluctuate still 
more widely. A comparison of the prices of 20 railway 
stocks on the Exchange has shown that the yearly 
fluctuation has been, on the average, from about $20 
to $35 ever since 1900. 

Thus, within the vague limit imposed by their 
security and dividend rate, the prices of stocks are 
truly arbitrary. They reflect the business standing of 
their companies only in a general way, till wholly 
absorbed by investors. Within the limits of their 
yearly fluctuations they are the reflection of the hopes, 
fears and necessities of traders in their money-making 
Another instance of the influence of this mental factor 
is that when a stock for the first time is run up some 
ten or fifteen points in a day or so, to a new high level, 
it usually reacts violently on sales, to obtain profits, 
made by purchasers at some lower prices. It may be 
that the new high price is really justified by the busi- 
ness position of the corporation whose stock is in 
question. Usually this makes no difference. The quo- 
tation is too new for speculators to be "used to it" and 
to hold out for it or for something like it. But if, 
after this first advance and reaction, the stock should 
again go up to the previous high price, its fluctuations, 
even on the same number of realizing sales. wiP 
almost always be much less violent than before. 
Traders have become accustomed to the new high 
price, and this fact shapes a willingness before non- 
existent to hold out more firmly for it. 



22 STOCK PRICES 

The capital of a speculator and the ease, difficulty 
or impossibility which he experiences in raising funds 
on his collateral necessarily affect his stock market 
position. So, too, his commitments are conditioned by 
the quantity of stock in the market for sale at a given 
price. Stock prices are thus made by three factors. 
There is, first, the mental element of the hopes and 
fears of traders as these arise from their knowledge and 
beliefs, and are expressed in their trading (chapters 
3 and 4) ; secondly, there is the relation of speculators 
to the banks as it affects this trading (chapter 5) ; and, 
thirdly, there is the actual manner in which, at a given 
time, stocks are distributed and held, to be considered 
(chapters 6, 7 and 8). These three factors will be 
taken up in turn. 



Ill 

The Trend of the Market 

Besides the professional room traders, who specu- 
late for their own account, all others who deal in stocks 
are necessarily customers of one or more of the bro- 
kerage houses possessing membership on the New York 
Stock Exchange. Some Exchange members prefer to 
handle bond rather than stock transactions, some have a 
limited and old established clientele with which they are 
content, while others make every effort to attract business 
and to open accounts with anyone of means with the de- 
sire to trade in securities. This latter sort of houses, 
especially, has frequently branch offices in the upper part 
of New York City as well as in out-of-town localities, 
such as the chief Eastern and Middle West cities. 

The great majority of a broker's customers dealing on 
margin trade in his ''customers' room,'' so as to be posted 
by ticker or blackboard on the current stock quotations on 
the Exchange. The richest traders, however, usually 
transmit their orders over telephones, often by private 
wire, or by personal interview with a member of the firm. 
Great professional operators, moneyed individuals with 
interests beyond their own business, banks, trust com- 
panies and capitalists interested in corporation securities 

23 



24 STOCK PRICES 



— make up this wealthier clientele. Though the crowd 
which congregates in the customers' room of the broker- 
age houses is, man for man, usually much less well-to-do 
than the other customers as well as less farsighted, yet, 
in an advancing market it is often much more numerous. 
In boom times, such as the Spring of 1901 or most of 
1905 and 1906, it makes up what is known as the public, 
while in less active times it may shrink down to semi- 
professional habitues of the stock market — men often 
with some slack occupation or who are, for a time or 
wholly, at leisure from other business. 

Now, whether the market be watched by means of 
ticker or blackboard or by the trading of the brokers on 
the floor of the Exchange, experienced observers recog- 
nize that at times usually rather infrequent, the course of 
prices may be foreseen a day or two ahead from the char- 
acter of the trading at the moment. In various ways the 
dominance of buying or of selling orders may be indi- 
cated. Such signs are of varied sorts, and those able to 
appreciate their significance might be at some loss to de- 
scribe them on the spur of the moment. The character 
of the market thus expressed may be the effect of the 
orders of a number of interests working, unknown to one 
another, to the same or to similar ends ; or it may be the 
effect of a concerted plan of a group of wealthy traders ; 
or, again, both conditions may co-exist. Quotations may 
come faster or slower than previously, may show more 
or less steadiness or irregularity in the time of their ap- 
pearance ; may evince a change in the volume of transac- 
tions. Without entering into technicalities of these sorts, 



THE TREND OF THiE iMARKET 25 

it is sufficient to call attention to the fact that at times the 
trend of the market can be discerned for a short period 
ahead simply from its present action — the fact implying, 
of course, that the forces responsible for the present trend 
are not likely to pull up abruptly or to change their inten- 
tions. 

Now, as commission house customers assemble to 
watch the ticker or blackboard it is on the current fluctua- 
tions of the market that their commitments are based. 
Whether they discern its immediate course correctly or 
not, all traders can always see one thing — whether the 
market is advancing or declining. It is on this single un- 
equivocal fact that the great majority of the commitments 
in customers' rooms are made. The longer the market 
keeps going up and, consequently, the nearer it must be 
to its top, the more speculators — the more of the ^'public'' 
— enter on the scene and buy shares, attracted by the 
great activity and by stories of gains and all hoping for 
still higher and higher prices. Thus whether successful 
or not, the great mass of commission house traders who 
attempt to discern the coming trend of the market simply 
from what it is doing at the moment, do not make the 
current trend themselves. They follow it. It is true that 
by this trailing behind the market, an ever growing mass 
of speculators have, at rather rare intervals, become re- 
sponsible by their combined buying for a rise of prices to 
heights which, otherwise, they could not have touched. 
An instance of this sort of things was in April, 1901, 
though, even here, their uniform, if incoherent, action 
was sustained and directed bv the concerted activitv of 



:£ STOCK PRICES 

wealthy individuals and interests concerned in the course 
of prices. But in any event, no matter how the specula- 
tive ^'public'' may enhance and protract the trend of the 
market, they follow it as it presents itself to them ; they 
do not make it. 

But if the public do not make the trend of the market, 
neither do the few hundred room traders on the Ex- 
change floor, whose commitments are usually cleaned up 
over night. Of course, individuals among them may antic- 
ipate the course of prices and by acting on this anticipa- 
tion help to create it. Moreover, it is true that this picked 
body of speculators discern the signs of the day-to-day 
trend earlier and far better than the average commission 
house customer; but, generally speaking, the fact that 
room traders are usually thus alert to seize the course of 
prices is, in itself, a statement that though they may rein- 
force this course, they do not make it. 

It was noticed in a previous article that a stock tends 
to sell at prices which net something not very far re- 
moved from the rate of interest which would be expected 
on such security as it affords. But experience shows that 
investors, buying with the idea of security in their minds, 
are not very apt to buy when stocks are at very low fig- 
ures, because the general business situation is then either 
strained or generally thought to be so, and the investor, 
above all things, wants security. Apparent exceptions to 
this rule will be found mostly to concern stocks of such 
speculative position that, even when held after purchase 
for the dividends they afford, the idea of income alone 
could hardly have been paramount in the intention of tht 



THE TREND OF THE MARKET 27 

purchaser, else more conservative transactions would 
have been effected. It has been shown that strict invest- 
ment buying is very small in amount compared to specu- 
lative and is very dift'erent in different stocks. The 
largest amount of investment buying occurs not when 
stocks are very low, but, rather, when they have 
about completed a rise, as 1901, 1905 or 1909. The 
relative stability of prices is then an inducement 
to buy, to the man who looks chiefly for income 
and who is not so much concerned with the 
quotation for the stock as with the steadiness of this 
income. Confirmation of this view is afforded by the fact 
that it has been at such times that the bond market which, 
of course, is dominated by investment buying, has been 
strong and active. When stocks advance too far, though 
their security is undiminished, they cease to be attractive 
to investors owing to the small net return they afford. 
This was the case in the fall of 1902 and in the opening 
month of 1906. At the former time, it has been com- 
puted, twenty-eight dividend paying railroad stocks yield- 
ed Z''^% on the investment, while, again, in 1906, thirty- 
nine dividend paying railroad stocks net on an average 
only 3.5%. Returns of these sorts are safer from bonds 
and savings banks. Thus, while investment transactions 
limit, in the end, the upward course of the market, they 
do not make its trend any more than do the commission 
house marginal customers. 

It is thus evident that the speculators and the investors 
who go with the trend of the market, do not make it in 



28 STOCK PRICES 

any instance. Evidently, then, the upward or downward 
trend must be made by specuators whose commitments 
take place when the market is either moving downwards 
or upwards, respectively, or is at a standstill. Such trad- 
ers buy when prices are low and sell when they are high. 
The speculative investors who buy, as a rule, in odd lots 
and pay outright have already been referred to. From its 
yearly returns, the Journal of Commerce draws the con- 
clusion that "American stocks were most widely distribu- 
ted after the panic of 1907''; in 1906, its reports showed 
an average in all roads from which figures could be ob- 
tained, of 3,825 stockholders ; before the panic, this num- 
ber had risen to 4,627 ; after the panic it reached the num- 
ber of 10,086, which in 1908 had shrunken to 5,647. At 
the end of 1909 it was 5,336. These comparisons are not 
exact, as the number of roads reporting to the Journal 
rises from year to year. For the present purpose, they 
are, however, sufficient. Such purchases and sales are 
the record of all the successful transactions during that 
period, which were registered in transfer books of the 
corporations. The great mass of others likewise success- 
ful were of the same type. Whether he be the buyer of 
two shares or of two thousand or of twenty thousand, it 
is the holder financially strong in proportion to the size 
of his holdings, and with the foresight to deal as just 
stated, who makes up the accumulated number of specula- 
tors on the right side of the market and who creates its 
trend. ^ i 

Apart from "scalping" from room traders and others, 
successful commitments are, thus, not based on observa- 



THE TREND OF THE MARKET 29 

tion of the course of the stock market, only. Such obser- 
vation, at the best, indicates fluctuations usually of but 
a day or two in duration ; and the successful speculator 
nolds his shares for a legitimate profit which generally 
takes much longer than a day or two to accumulate. The 
speculator, large or small, financially, who has the mental 
make-up which ensures his action on the right side of the 
market, is not the typical commission house trader, who 
pops in and out the market with every breath of rumor 
or short-time fluctuations on the ticker. In the most gen- 
eral sense, it may be said that, whether made by ''bargain 
hunters" or by wealthy magnates, successful commit- 
ments are based on the expectation of business improve- 
ment, or, in the case of short selling, of business depres- 
sion. Of course, such expectation is more or less ex- 
plicitly thought-out and more or less exact, according to 
the character and the knowledge of each trader. After a 
severe business let-up, as in the opening months of 1908, 
the same actual amount of goods, except in so far as con- 
sumed, are in existence as before; so, too, the same 
amount of money on w^hich to base credit transaction^, 
except in so far as gold may have been exported or im- 
ported. But buyers and sellers have gotten out of touch 
with one another. The producer cannot find a quick mar- 
ket for his commodity, the consumer has more than he 
wants — at least at the old prices. Hence, a picking up of 
business after a depression is a resumption of the de- 
mands of the great consumers, those, for instance, of iron 
and copper. Large crops tend to force the resumption 
^rom the side of production by the amount of capital they 



30 STOCK PRICES 

evoke from the earth. A foresight of a revival of trade 
in the steel and copper trades and of the advent of large 
harvests are the expectations on which when financially 
backed, long upward swings of the market are normally 
based. 

The beginnings of recuperation in the great industries 
are not, however, so evident to the outsider as they are 
to those experienced in the trades themselves. A great 
mass, if not the majority, of successful "public" commit- 
ments, are, therefore, probably based more on the gen- 
eral fact that stock prices, judged by net income returns 
and by the financial status of corporations, are too high or 
too low, than on more special knowledge. Great corpora- 
tion interests and their immediate circles can see more 
clearly and more definitely. Prices of the United States, 
steel stocks began to improve, in 1904, some months be- 
fore outsiders could discern an improvement in the iron 
industry. Again, Amalgamated Copper shares reached 
what were practically top figures in the opening of 1906, 
a full year before the price of the metal had attained its 
apex. The same stock (in company, of course, with the 
rest of the market) began its downward journey in 1907 
before the price of the metal began to break wide open. 
In all three cases, the conditions in the trade were fore- 
seen by successful ''inside" traders in the stock. The 
capitalists in a great corporation are likely to foresee bet- 
ter than others the coming expansion or contraction of 
their business. But the industries of a country rise and 
fall pretty much together. Thus, ai..>t from precon- 
certed action (which may also obtain), the great moneyed 



THE TREND OF THE MARKET 31 

interests of the country, desiring to profit by a rise in the 
business status of the trades with which they are affilia- 
ted, act to the same end in the stock market, at the same 
or nearly the same time. 

Thus, in the case of each class of traders considered, 
their stock market commitments arise from their knowl- 
edge or beliefs as these arouse their hopes and fears. The 
commission house customer bases his beliefs on the trend 
of the market as he sees it from day to day, seconded in 
his decisions, possibly, by other considerations equally un- 
certain, such as the hearing of ''tips." The investor 
grounds his purchases and sales on his wish for security 
and for a fair sized net return, while the thoughtful spec- 
ulative element of the community — the ''speculative in- 
vestors'' and "wise'' marginal traders — act hand in hand 
with the great capitalists in perceiving the right time to 
buy and the right time to sell to obtain the wished-for 
profits. 

There are always two sides to the market: the wrong 
side and the right side. Those on the right side are al- 
ways opposed to those who are wrong, gaining where 
they lose or where they fail to gain. But this opposition, 
as a general individual rule, is not intentional, though the 
fact of its existence may be relied on by those who fore- 
see correctly ; but it depends, in the end, on the fact that 
the one side, in being right, must necessarily be opposed 
to the other side, in being wrong. Where the former buy 
or sell or do nothing, the latter do one of the three when 
something undone was the proper course. 



IV. 

The Priority of Stock Prices 



After a period of commercial depression, such as that 
which occurred in the early part of 1908, stocks be- 
gin to advance in price before a recovery in trade 
becomes manifest. Likewise, as in 1907, share prices fell 
previous to the coming of commercial disaster. This fact 
is known as the ^'priority'' or ^'anteriority'^ of stock prices, 
or as the process by which the stock market "discounts" 
the future. The general proof of the occurrence of this 
situation is best given by a comparison for years past of 
bank clearings and gross railway earnings with stock 
prices. Of all the indices of general prosperity or of 
general depression the country over, none is so immediate 
and so certain as the quantity of bank clearings, because 
this quantity is nothing but the amount of cheques which 
change hands, or the very aggregate sum of all important 
sales themselves. The following table gives the bank 
clearings of the United States by months since 1900, six 
ciphers being omitted in each number, so that, for exam- 
ple, the first month's clearings in full should read $7,643,- 
000,000 : 

32 



PRIORITY OF STOCK PRICES 33 

U. S. BAXIv CLEARINGS. 

January. February. March. April. May. June. 

1900 7,043 6,432' 7,625 7,472 7,310 6,667 

1901 10,716 8,358 10,003 12,010 12,825 10,105 

1902 10,659 8,359 8,882 10,926 10,386 8,208 

1903 11,088 8,468 9,582 9,581 9,118 9,422 

1904 9,436 7.713 8.383 8,309 8,215 8,058 

1905 11,848 10,650 12,918 12,735 12,059 10,815 

1906 16,321 12,462 12,993 12,884 13,218 12,230 

1907 15,020 11,792 14,625 12.636 12,382 11,136 

1908 11,359 8,756 9,777 9,764 10,858 9,825 

1909 14,035 11,244 12,606 13,664 12,889 14,134 

•1910 17,136 13,105 15,017 14,001 13,142 13,810 

July. Aug. Sept. Oct. Nov. Dec. 

1900 6,256 5,707 5,626 7,621 8,758 9,071 

1901 9,369 7,990 7,971 9,536 9,853 9,810 

1902 10,170 8,943 10.157 11,357 10,087 9,894 

1903 9,767 7,921 7,673 9,176 8,169 9,295 

1904 8,660 8,008 8,844 11,509 12.505 12,804 

1905 10,866 10,902 10,885 12,624 13,149 14,452 

1906 11,639 13,131 12.497 14,529 13,633 14,265 

1907 12,348 11,527 10,551 13,779 9,659 9,407 

1908 11,071 10,248 11.112 12,136 12,975 14,3'c/4 

1909 13,450 13,494 13.523 15.851 14,761 15,843 

1910 13,287 11,508 11,361 15,787 13,595 13,932 

The accompanying diagram gives a graphic representa- 
tion of the course of the two series. The amounts of 
the bank clearings are derived from the Financial Chron- 
icle's compilations ; the stock prices are the average of 
the twenty roads whose quotations are reported in this 
form day by day by the Wall Street Journal. 

In examining the table and diagram it should be re- 
membered that the winter months are likely to show 
heavier business dealings than the summer months. The 
truest comparisons, therefore, are of the clearings of a 
month with those of the same month in the previous year 
— something shown at once by the table. 

It will be seen, first, that general business activity, as 









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PRIORITY OF STOCK PRICES 35 

measured by the volume of clearings, has been preceded 
by a rise in stock prices and that general business de- 
pression has been preceded by a fall in the prices of 
securities. Thus, the rise in stock prices in 1900 began 
in the early fall, when clearings were at their lowest, and 
culminated for a time in April, 1901, after which prices 
reached their extreme top in September, 1902, after a 
year and a half of backing and filling with an upward 
trend. But, comparing the bank clearings, month by 
month, it will be seen that each month's record was 
higher than that of the corresponding month of the pre- 
vious year till after the opening of 1903, the only excep- 
tions being a few months in the bull market of the first 
half of 1901. 

Stock prices reached bottom in the latter half of 1903, 
when bank clearings had just begun to fall ofif largely, 
and had risen many points by September, 1904, when 
bank clearings picked up quickly. Compared with the 
months of previous years, clearings did not show signs 
of falling ofif again till August, 1907, although stocks 
had then been going down for months and had, indeed, 
reached their top point, some in the ''Union Pacific 
boom" of August to October, 1906, some in January of 
the same year. Till the middle of 1908, clearings showed 
a steady falling oflf, though stocks had been rising since 
November of the preceding year in many cases, and in 
all, since the opening of 1908. Again, stocks began to 
fall after August, 1909, but clearings not till a year later. 
It will be noted that the fall in stock prices in 1903 was 
not followed by so extreme a commercial depression as 



^e STOCK PRICES 

in 1907. Business was, relatively, but slightly affected. 
If, during the ten years under consideration, railway 
gross earnings be examined, the priority of stock prices 
to commercial conditions as reflected by these earnings 
will again become manifest. Railway earnings by regis- 
tering the distribution of commodities are next to clear- 
ings probably the best index to the status of general 
business. The following table, compiled from the Finan- 
cial Chronicle, shows the percentage increase or de- 
crease in gross earnings for every month since the be- 
ginning of 1900, over the corresponding month of the 
preceding year. As the same roads have not always re- 
ported in each month during this period, and as the 
Chronicle has been able to give much fuller reports in 
recent years than formerly, the table is not minutely 
accurate, though more than sufficiently so for the present 
purpose. In all months the returns include those of the 
greatest systems and cover usually from three-quarters 
to four-fifths of the whole country's mileage. 

PERCENTAGE VARIATION OF RAILWAY GROSS EARNINGS 
OVER CORRESPONDING MONTH OF PRECEDING YEAR. 





Jan. 


Feb. 


March. 


April. 


May. 


June. 


1900 


.... 15.14 


19.86 


12.50 


12.69 


10.67 


9.23 


1901 


7.94 


7.50 


7.43 


8.94 


9.41 


6.80 


1902 


7.61 


3.92 


6.30 


11.03 


9.18 


7.16 


1903 


9.40 


13.86 


14.42 


13.67 


11.98 


14.02 


1904 


.... —4.55 


2.60 


—0.06 


—3.18 


—2.77 


—0.81 


1905 


6.58 


—3.01 


9.73 


7.35 


11.09 


9.66 


1906 


.... 20.88 


26.36 


10.61 


6.78 


9.83 


12.11 


1907 


6.51 


6.05 


9.65 


21.45 


18.12 


13.59 


1908 


.... —12.49 ■ 


-11.79 ■ 


—13.37 - 


-18.89 . 


-22.67 ■ 


—18.47 


1909 


5.54 


8.34 


12.13 


12.50 


15.58 


14.33 




July. 


Aug. 


Sept. 


Oct. 


Nov. 


Dec. 


1900 


3.86 


6.14 


2.21 


5.03 


2.14 


9.05 



PRIORITY OF STOCK PRICES. 37 

1901 3.40 12.67 10.46 11.87 12.22 5.65 

1902 7.65 4.76 9.55 6.71 6.97 9.86 

1903 11.96 9.18 6.98 5.34 4.03 4.66 

1904 —5.35 0.51 2.81 3.21 9.51 7.20 

1905 10.02 9.23 9.28 8.54 10.35 9.64 

1906 13.73 12.11 7.58 10.77 6.24 7.90 

1907 14.28 12.27 9.71 8.56 3.14 —6.20 

1908 —14.87—16.64 —6.23 —6.95 —2.92 5.42 

1909 12.66 14.35 12.35 11.80 16.51 6.39 

It will be seen from this table that stock prices were 
falling during 1903 and 1907, while at both times gross 
earnings were expanding largely. And that, when earn- 
ings began, in 1904 and still more so in 1908, to fall 
off, they continued to decrease long after stocks had 
reached bottom and were again commencing to go up- 
wards. This is very clear in 1908, when earnings, 
which did not begin to fall till after the end of the finan- 
cial panic in October, continued to decline till the very 
last month of 1908. 

But while the priority of stock prices to general busi- 
ness expansion and contraction is thus unmistakable, and 
while from the point of view that in a bull market this 
priority is the expression of speculative foresight, it 
seems not only reasonable but almost inevitable, from 
another standpoint this priority of prices appears a 
paradox. 

Stocks are bought for investment and for specula- 
tion. But both investment and speculative purchases, 
whether made by individuals or by corporations, are 
made, in the case of new commitments, out of their sur- 
plus capital — with resources whose use is not essential 
to the maintenance of the company or individual and 



38 STOCK PRICES 

which are not already tied up. In other words, it would 
seem that shares could be bought in large quantities at 
advancing prices only when there is much spare cap- 
ital on hand with which to buy them, and that this could 
be the case only when commercial prosperity was well 
in the ascendant. In the same way, it might be expected 
that the pinch of commercial stringency would have to 
be felt before investment and speculative holdings began 
to be sacrificed in large amounts. Far from ''discount- 
ing" the future, it appears, from this consideration taken 
by itself, that stock prices should do the reverse — should 
have their variations preceded by the business changes. 
To explain this apparent contradiction, some facts re- 
garding marginal accounts should be kept in mind. 

In the usual brokerage transaction it is customary 
for the speculator to supply about ten points of the stock 
price, for the broker to supply an additional ten points, 
and for the remaining sum to be lent by the broker's 
bank against the re-pledge of the customers certificates 
as collateral security. On the whole, it may be said 
that the New York national banks, which, as a rule, 
handle nearly all city loans of this sort, lend from about 
75 per cent to 80 per cent of the funds to finance the 
carrying of stock for a rise. Let us see how this affects 
the course of prices. 

Stocks, as has been seen, begin to rise before the ad- 
vent of renewed or of greatly enhanced prosperity. At 
such times, they are in the strong hands of investors, of 
speculative investors and of individuals and groups of 
speculators, mostly wealthy, but, in all cases, able to 



PRIORITY OF STOCK PRICES 39 

carry easily the shares, few or many, which they hold. 
A portion of stocks, both dividend paying and otherwise, 
is held by them, as at other times, for purposes of cor- 
poration control, and is, consequently, not for sale. But 
besides this stock and that of the genuine investors, the 
remaining shares, held for speculative purposes, are car- 
ried by owners firmly believing in an appreciation in 
prices. The existence of this confidence at such times is 
not a more or less probable fact ; it is a definite certainty ; 
for those who do not have it, or who have not had the 
capital to hold stocks, have necessarily sold out by the 
end of a long decline. It is a case of the survival of 
the fittest. 

When stocks are thus in strong hands, after falls of 
many months, such as those of 1903 and 1907, a period 
of dullness is likely to precede an upward movement in 
quotations. Thus, August and September, 1900, both 
dull months, preceded the great bull market of 1900 to 
1901 ; May and June of 1904 were followed by the bull 
market of 1904 to January, 1906, while, finally, dull- 
ness of November, 1907, signallized the end of the long 
decline of that year. After a rise in December, renewed 
liquidation of weak holders, watching their chance to get 
out as best they could, brought about another decline in 
January, 1908, to be followed again by a dull February, 
after which the long advance of 1908 to August, 1909, 
began. Facts of the same sort, on a lesser scale, are true 
of the shorter swings of the market. Dullness occurs 
after the end of a fall because offers to sell stock have 



40 STOCK PRICES . : 

ceased to predominate over bids to buy, while both have 
greatly lessened in number and importance. 

It being to the interest of a bank to lend on collateral 
as much as is consistent with proper security and, as in 
times of dullness following a long decline, great quan- 
tities of stock are carried by banks for wealthy and in- 
fluential depositors — often their own stockholders and 
directors — policy as well as the knowledge of the low 
range of prices obtaining induces banking institutions to 
be liberal in their loans. 

At the beginning of an upward movement of large 
extent — of which the months named above offer good 
instances — the stock carried speculatively is, when not 
held outright, often pledged directly with banks instead 
of through brokerage houses; indeed, the remark of a 
broker has become well known, namely, that the only 
sure sign of a long advance in the market he had ever 
been able to detect was when commission houses carried 
little or no customers' stock for a rise. When stocks 
begin to move upwards, the price has to be frequently 
bid up a fraction to effect a purchase. There is an in- 
clination, especially among the room traders, rather to 
buy on a quarter's advance than to sell on a quarter's 
recession. And this feeling growing, slowly or fast, 
prices rise while the volume of sales swells in size over 
that of the dull period. 

In an advance from low prices to high such as occurred 
in the three years repeatedly referred to — 1900, 1904 
and 1908 — relatively few men, even of the wealthy, on 
the right side of the market have a definite idea of how 



PRIORITY OF STOCK PRICES 41 

long the advance which they foresee will persist. Ex- 
perienced stock market observers, however, find that 
pressure to sell stock has ceased and that offers of short 
sales produce little or no eft'ect on the market, as the 
offers are readily accepted at every concession of a frac- 
tion and are with difficulty covered, save w^ith a loss. 
Everyone soon accepts the basic fact that the market 
has reached bottom, in other words, that no one wants 
to part with shares at the prices obtaining. 

The speculative impetus in an upward movement is 
made possible by the aid of the banks. A stock in which 
there is no speculative interest, assisted by bank funds, 
moves wuth extreme sluggishness from year to year, and 
follow^s the market very slowly and quietly. Such a stock 
was Western Union up to 1907, when it fell heavily, 
probably through investment liquidation, aided by short 
selling. The company lost very much business in 1908 
and finally cut the dividend. 

The priority of a decline in stock prices to a decline 
in general business is as certain as the converse situation 
just discussed, but the business depression does not neces- 
sarily take place on such an extended scale as might 
have been conjectured by an observer of the decline in the 
stock market ; for instance, the stock decline of 1903 was 
so much more severe than the commercial decline that 
this fall in share prices has been spoken of as a ''dis- 
count'' by the market of a situation which never even- 
tuated. Although in a stock decline preceding a busi- 
ness contraction the element of foresight leads some in- 
vestors to sell the stocks owned of such companies as 



42 STOCK PRICES 

they think may decline in prosperity, and although such 
liquidation may be strengthened in its pressure on the 
market by short selling, yet the priority of a long decline 
in share prices (as aside from the fact of the decline 
itself) is caused by other factors involved in the relations 
of the banks to stock prices. (See next chapter.) Here, 
it will be sufficient to say that just as relatively great 
dullness precedes an advance, so relatively great activ- 
ity at the top of an advanced or advancing market, other 
things being the same, is likely to precede a decline; 
and, in a declining market, to mark its consummation, 
for the moment or for good. The top points in April, 
1901, September, 1902, January and August-September, 
1906, are evidence of this as far as extended swings are 
concerned, and it will be found to be true of swings 
shorter in duration; although other factors seem more 
frequently to interfere with the working of this prin- 
ciple than with that of the converse one of dullness pre- 
ceding an advancing market. Activity at top notch fig- 
ures for any time is generally the distribution of stocks 
by those who are on the right side of the market at 
that time and who are taking their profits by sale to the 
less f arsighted. But why it should be apt to be followed 
at once with a fall without an intervening period of dull- 
ness, as is the case at the beginning of an advancing 
market, will appear more clearly later on, when short 
selling is discussed in full. It should, however, be said 
at once that there is nothing whatever to the nature 
itself of the stock market to prevent dullness being fol- 
lowed by a decline as well as by an advance, and that 



PRIORITY OF STOCK PRICES 43 

this sometimes happens. Thus, both February, 1907, and 
F^ebruary, 1908, were dull months relatively to those 
before and after, but the former was followed by the 
great smash-up of ]\Iarch, 1907, and the latter by the 
beginning of the upward movement for 1908. Simply, 
certain general characteristics of rising and falling mar- 
kets cause dullness much more frequently to precede 
rises than falls. 

Thus the priority of stock prices receives an explana- 
tion as far as an advance is concerned through the as- 
sistance given to speculation in stocks by the banks. 
Banks always have most to lend when the rest of the 
country has least. While the speculative funds of in- 
vestors and speculators are smaller in depressed than in 
inflated times, this is not true of banking institutions. 
The more business a bank does, the more its loans rise 
in amount, and the more difficult does it become, because 
of legal restrictions, to add to them. But the less busi- 
ness it does the more spare funds it has on hand, and the 
easier it is for it to make a loan. As the bank lends 
up to a certain percentage of the exchange price of a 
stock, the burden of the increased valuation of the stock 
as soon as it begins to advance is borne by the bank, 
while the speculator, whose margin with the bank is the 
same or nearly so whether the price of the stock be 50 
points or 75, does little more than register the advance 
in higher quotations and pay a slightly larger interest 
for the use of superadded funds as the share price ad- 
vances. 



44 STOCK PRICES 

If, for instance, a speculator has borrowed $8,000 
from a bank on a stock when it was selling at par and 
the stock rises on the Exchange to $120 a share he can 
probably borrow $2,000 more on the same stock, his only 
additional burden being the interest charge on this 
$2,000. This "pyramiding" of loans on stock collateral, 
a very important factor in a speculative market, is more 
fully discussed in the next chapter. 



V. 

The Banks and the Exchange 

The total amount of money held by all the banks In 
the country varies with the increase of Government 
coinage, with the imports and exports of gold, with 
the sum in circulation and with the amount of hoard- 
ing by individuals. From year to year the whole 
amount of money held by banks slowly increases. In- 
deed, it is evident that the actual money of a country, 
except as bullion or as precious metal, per se, is not of 
use in foreign countries. 

In the absence of gold and silver movements, a gen- 
eral swelling of bank deposits (as distinct from a mere 
shifting of deposits from one bank to another) means 
that the banks are making more loans and are placing 
the proceeds of these loans to the credit of the de- 
positors to whom they are made. When such loans 
are paid oflf, both the loans and the deposits arising 
from them are cancelled together. In the event of the 
winding up of a bank's affairs, the liquidation of its 
loans is a necessary preliminary to the payment in 
cash of its depositors, though the majority of the de- 
posits are ordinarily cancelled through the payment 
of the loans by which they came into existence. Be- 
fore the great development of banking in the nineteenth 

43 



46 STOCK PRICES 

century, a bank loan was generally a loan in the pop- 
ular sense of the word; the borrower either received 
actual money or bank notes or drew actual money from 
the bank as wanted (as he may, of course, still do). But 
in coming to lend far beyond the amount of money which 
they possess at one time, banks have come to lend 
what is really credit, not money. A bank loan has 
really become a publicly received endorsement that a 
borrower's security — stock collateral, notes or his own 
responsibility — has, at least, such and such a present 
cash value, which the bank permits him to barter, by 
means of checks, for such other goods as he desires, 
instead of obtaining these goods by the clumsier and 
often impracticable methods of the tender of promis- 
sory notes, shares, or by waiting for the indebtedness 
to him of others to mature. 

While in theory a bank's loans might expand to any 
amount provided they be made on proper security, in 
practice loans are limited in amount both by a popular 
misconception of the real nature of a bank loan and by 
Federal and State laws. National banks in the three 
"central reserve" cities (New York, Chicago and St. 
Louis) are required by Federal law to keep on hand 
in money (specie and legal tenders) 25% of their 
deposits. Any money over and above this amount is 
known as the bank's surplus reserve. By this law a 
limit is placed on the ability of banks to increase loans 
beyond a certain amount. For, as soon as a National 
bank in New York lends when its reserves are just 



BANKS AND THE EXCHANGE 47 

25% of its deposits, either (i) this new loan is placed 
as a deposit to the credit of the borrower and then 
the bank has less than the required 25% of deposits in 
money; or, (2), the loan is paid out and then the cash 
reserve is depleted that much and falls below the 
required 25^^ figure, again. As no bank wants to 
reduce good deposits save through the extinction of 
loans, it can increase its lending capacity otherwise only 
through obtaining more actual money, else it must keep 
its loans within this percentage. 

As a bank's deposits arise from its loans and from 
the receipt, in the end, of actual cash against such 
deposits as are not offset by the outgo of other 
cheques through the clearing house or otherwise, every 
payment of a loan reduces the deposit account of a 
bank toward the point where it is covered entirely by 
actual money. These deposits arising from loans, it 
may be noted, have their real nature better understood 
in Europe, where they are carefully distinguished, 
under the title of ''current accounts,'' from deposits of 
actual money or of cheques on other banks. 

The total deposits the country over have thus against 
them loans, money, and other resources (such as stocks, 
mortgages, etc.) belonging to the bank. When deposits 
in a bank fall in amount below loans, this means that 
money has been withdrawn from that bank against these 
loans, against other deposits not arising from loans, or 
has been invested by the bank itself. But when loans are 
greater than deposits it also means that the sums so 



48 STOCK PRICES 

withdrawn must be greater than the sum of all remaining 
deposits whiA do not arise from loans. 

In the three central reserve cities, National banks must 
keep, as already stated, 25 per cent of their deposits in 
money in their vaults. In the reserve cities, including the 
large municipalities, National banks must keep the same 
reserve, but instead of retaining it all in their own vaults 
they may deposit one-half of it in National banks in the 
three central reserve cities. The country National banks 
must keep 15 per cent of their deposits in money as a 
reserve, but of this 15 per cent, three-fifths may be de- 
posited in National banks in the reserve or in the central 
reserve cities. Thus, the country National banks need 
keep on hand in actual money only 6 per cent of their 
deposits, and banks in the reserve cities need keep on hand 
in actual money but I2}4 per cent of their deposits. Now, 
as money is very frequently easier to lend in New York 
than elsewhere, this situation brings it about that many 
interior banks leave large balances, as part of their legal 
reserve, with banks in New York City, and, to a lesser 
extent, with banks in Chicago and St. Louis. But this 
money is counted by the National banks in these three 
cities as part of their legal reserve. Hence, when a call 
from the interior banks for this money is made to replete 
their own reserves, such a call entails a great and imme- 
diate drain on the reserves of the National banks in the 
three cities mentioned, and especially in New York. 

Every year such a drain occurs sometime in the Fall. 
To move the crops, farm hands must be paid in cash, and 



BANKS AXD THE EXCHANGE 49 

to get this cash the interior banks are drawn on. These 
having but Httle money on hand draw on their balances 
in the reserve cities and in the central reserve cities, but 
chiefly in New York, where the great balances of this 
sort accumulate. The result of the situation is, that if a 
great demand for cash arises in New York at the same 
time as a great demand for cash in the interior, the New 
York banks bear the brunt of the situation. At such 
times, as in 1907, to get money New York banks must 
import gold from abroad or get it from the United States 
Government by its deposit with them of Government 
funds. 

In Europe, when a great demand arises for actual cash, 
the banks issue bank notes to meet the drain. European 
bank notes may be issued against discounts of commercial 
drafts or of drafts accepted by a bank. The brisker 
business is, the more such paper will come to the banks 
for discount or for loan, and the more credit balances 
will increase or the more bank notes will be paid out, as 
wished by the seller of the draft. In times of a panic, 
when the demand will be for cash, bank notes will issue 
to meet such demand. Of such an elastic currency system 
there is hardly a trace in America, though the Aldrich 
currency plan submitted to the National ^Monetary Com- 
mission early in 191 1 will probably lead to action by Con- 
gress along such lines. But, as things stand, our National 
banks can now^ issue bank notes only by first buying 
Government bonds, then depositing these with the United 
States Treasury and taking out in return bank notes equal 



50 STOCK PRICES 

to their face value. As the bonds cost more than their 
face, or par value, in the market, this usually involves a 
loss to the bank unless current interest rates are so low 
that it can recoup by means of the interest paid it by the 
bonds. But this situation also withdraws money from the 
banks which they need as reserves against their deposits. 
It takes more than $10,000 for a National bank to take 
out $10,000 worth of bank notes, but this $10,000 if held 
by the bank might have been a reserve against $40,000 
of loans in New York, if these loans were placed to the 
depositor's credit, i. e,, if he did not want to withdraw 
actual money for his loan. Evidently, just when we need 
bank notes most — in •times of panic — the banks have to 
hold on to every cent of their money as a reserve to cover 
their deposits. 

We may now take up the connection of bank loans in 
New York with stock exchange collapses. To understand 
this thoroughly, the function of call loans in the New 
York money market must be taken into consideration. A 
stock market rise, as has been seen, involves the extension 
of credit by the banks against securities to about 80 per 
cent of their price on the Exchange. Now, when New 
York banks have liquidated many of their loans, cleaned 
up the deposits based on them and received back on de- 
posit from the interior a large amount of money as 
reserves for the interior banks, or for the sake of metro- 
politan investments, the New York 'banks have large 
reserves against which large credit loans — large "current 
accounts" — ^may be made. This is their position at the 



BANKS AND THE EXCHANGE 51 

wind-up of financial crises generally. When this is the 
case, the deposits of the New York banks will show an 
excess in amount over their loans. This excess is known 
as the ^'surplus deposits/' and it may be worth while, first, 
to note its variation compared Avith market fluctuations. 

If the diagram be examined, the relations between 
surplus deposits of the New York national banks and 
stock prices w^ill be apparent almost at a glance. In 
1902 and in 1905 to 1906 falling surplus deposits pre- 
cede falling stock prices. In 1903 to 1904 and in 1907 
to 1908 rising surplus deposits precede a stock appre- 
ciation. The facts can be examined closer and the 
same relation \vill be found to hold. In 1903 and 1907 
the surplus deposits reached their highest minus point 
at just about the culmination of the decline. Again, 
they were highest, positively, in 1901 before the great 
Spring rise of that year, in 1904 when they furnished 
the ammunition for the bull campaign of 1905, and 
since the end of 1907 when they shot up like a rocket, 
at the beginning of 1908. 

Why an excess of loans over deposits is undesirable 
from a stock market standpoint may be still clearer 
from the following considerations. The loans of banks 
at such times may be, it is true, thoroughly sound, and 
even beneficial as far as the banks are concerned. But 
such a condition necessarily implies that some of the 
deposits (arising from the proceeds of the loans) have 
been depleted by the withdrawal of actual money. 
Should the banks in question, in such a situation, call 






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BANKS AXD THE .EXOHAX-GE 53 

their loans, a greater or less number of customers will 
be unable to cancel their indebtedness by drawing 
checks against their credit balances — a liquidation of 
their securities pledged as collateral for their loans 
will be enforced, with a depressing effect on prices of 
securities, as explained more fully in the following 
paragraphs. 

In Europe the bulk of bank loans are made on com- 
mercial transactions. The seller of goods draws on his 
bank, his draft is accepted by his bank and may pass 
by endorsement through many hands or may be dis- 
counted by a note dealer and afterwards re-discounted 
by a central bank. In America the promissory note 
of a purchaser of goods may be endorsed by the seller 
of the goods and discounted at the latter's bank, but 
there the matter ends. The bank can do nothing with 
the note till its maturity. Drafts on a bank accepted 
by the bank and made the basis of discounts and re- 
discounts by other parties are practically unknown 
with us. This primal difference between the practice 
of banking in Europe and in America is the cause of 
the fact that with us a vast bulk of 'bank loans is 
made on securities listed on the stock exchanges. 
From this fact another of great importance flows. In 
Europe stock settlements are made fortnightly or 
monthly, but on the New York Stock Exchange they 
are made daily through the Stock Exchange Clearing 
House. Hence the necessity in New York of con- 
stantly shifting, extinguishing and remaking loans 



54 STOCK PRICES 

concurrent with the sale and transfer of shares carried 
by brokers on margin. From this situation has devel- 
oped our call loan market on stock as collateral, which 
has no analogy in Europe, where loans on stock, fol- 
lowing the course of the fortnightly stock settlements, 
are made for two weeks or longer. 

Call loans on shares in America are payable on de- 
mand by the lender; or, more collateral may be de- 
manded or a higher rate of interest, or both, and a 
new loan made. By Chapter 237 of the New York 
State laws of 1882, call money rates may be of any 
percentage on loans of $5,000 and upwards. If, in the 
case of the call of a loan, the money or more security 
is not forthcoming, the collateral may be sold by the 
lender to defray the loan. So, too, with time loans on 
stock, it is provided that if the lender wish, he can 
demand more stock as collateral before the maturity 
of the loan. Now, in times of large surplus reserves 
(over 25% of the deposits) the banks make time loans at 
low rates of interest very freely on stock exchange col- 
lateral. Through the aid of these loans stock prices 
advance on the Exchange (as outlined in the preced- 
ing chapter), and, having thus advanced, more money 
is lent on the same security, on the basis of the higher 
prices which the prior loans have brought about. In 
other words, by "pyramiding" their loans on stock 
exchange collateral, banks create the very valuations 
on which they rely to lend. As loans expand, call 
money rates may advance. Finally, when, through 



BANKS AND THE EXCHANGE 5b 

the drain from interior points or from other reasons, 
the New York National banks can no longer increase 
the amount of their loans without falling below their 
25% surplus reserve mark, they may begin to restrict 
loans both by increasing the rate of interest and by 
demanding more and more stock collateral of the same 
sort for a loan of the same amount. But these de- 
mands of the banks for more stock collateral or for 
settlement of their loans, bring about sales of shares 
on the exchange to effect the cancellation of the loans 
— the sales, of course, being largely of the collateral 
pledged by the borrowers with the banks making the 
calls. At first, this stock may be mostly that of weak- 
ened brokerage accounts carried on margin, but re- 
hypothecated by the brokers carrying it with their 
banks. But such sales causing a fall in prices by the 
selling offers which they occasion, more loans are 
called by banks, as the collateral with them is now 
below its former nominal value as estimated by the 
exchange quotations. Thus, more and more collateral 
IS called for, to secure already existing loans and to 
cover the shrinkage in exchange valuation brought 
about through the previous calls. And this recurrent 
process may continue until the lending power of the 
banking community is restored by the influx of actual 
money from other localities or until the loans and 
deposits, lessening hand-in-hand, become low enough 
to raise the surplus reserves well above the 25% danger 
line. 



56 STOCK PRICES 

Thus, by their reliance on stock exchange quotations 
as measuring the true value of the stock collateral which 
they hold, the banks build up the very exchange prices 
on which they rely to lend, and, again, when they are 
in strained positions, they, themselves, destroy those 
very prices. Here, then, is a main cause of the pri- 
ority of our stock market declines to commercial 
troubles; the banking strain seeks relief by throwing 
off its stock market burden, inducing liquidation, an^d, 
in doing so, it crumbles stock exchange quotations. 
Only a minor part in the matter can be granted to 
those traders who, foreseeing and accompanying with 
their commitments the genuine sales brought about 
by the banks' demands, sell stocks short to accelerate 
the decline. 

But it is possible that a great fall in prices, though 
dependent on the connection of bank loans with spec- 
ulation, may start from the side of the speculators. It 
may, in other words, reflect not so much a weakened 
condition of the banks as an over-extended position of 
speculators brought about by previous over-extended 
bank loans. The exploitation of vast enterprises in 
America has had the effect, again and again, of tying 
up liquid capital; or, to speak more concretely, of 
bringing about a situation where, at current prices, 
goods of one sort were not readily exchangeable for 
goods of other sorts. Such was the case as regards 
exchange securities in 1903. In that year the ^'undi- 
gested securities" which their nominal owners could 



BAXKS AND THE EXCHANGE 57 

neither hold outright, sell to others at current quota- 
tions nor carry any longer on banking terms, were 
mostly listed on the Exchange. In 1910 the over- 
supply was more of securities of other sorts into which 
the surplus capital of the country became largely 
drawn, leaving too little to absorb standard issues at 
previous prices, when they were offered for sale. . 

In Europe, it is true, the same custom prevails as 
with us of lending on the basis of the bourse valuation 
of a security. But as our call loan system on stock as col- 
lateral does not obtain there, the same drastic situation 
is not occasioned. Loans on shares in Europe being 
made from fortnight to fortnight, or from month to 
month, are, for that length of time, based on a valuation 
which they, themselves, w^ill not help to alter in the 
meanwhile. ^Moreover, European banking conservatism 
will not lend on the basis of bourse prices where these 
dififer radically from true values. 

Call loans in New York City have been stated by 
an authority as about 35 per cent of all loans on securi- 
ties. They are particularly plentiful both in times of 
financial ease and of financial stringency. In the 
former case, borrowers prefer to accept funds in this 
manner to get the advantage of the lower interest 
rates, and also, because, as the banks are then strongly 
entrenched, there is practically no apprehension of 
loans being called or more collateral being demanded. 
The banks, also, have then no objection to lending on 
call, as a call rate can be advanced at any time, if it 



58 STOCK PRICES 

should become expedient to do so. On the other hand, 
in a stringency, banks prefer call to time loans because 
they can raise the rate of interest as much as they 
please or close the loan for good instead of demanding 
more collateral, if they wish. Firfally, when money is 
neither very easy nor very tight, borrowers prefer time 
loans because of the more reliable condition of a fixed 
rate of interest, while the banks, on their part, have 
as yet no objections to accommodating them in this 
way. 

When surplus reserves are high, call money rates 
are likely to be low, and vice versa. The point cannot 
be pressed too far, because banks sometimes show 
singular inability to provide against a coming crisis 
and continue to lend over-freely much too long. Again, 
at a time when there has been much liquidation, call 
rates may become low, as the loans already made are 
strongly buttressed and there is little demand for 
new ones. The period between 1900 and the present 
time, however, illustrates the relation sufficiently well. 
It may -be thought that 'time loans on commercial 
paper are likely to exhibit banking difficulties even 
better than those on call on collateral, as the demand 
for commercial accommodation is more genuine and 
is not to be disguised through the medium of nominal 
quotations or through the advent of times when few 
loans are demanded. Both sorts of loans, however^ 
point in .the same direction. The table at the end of the 
chapter shows the highest rates of call loans each month, 



BANKS AXD TilE EXCHANGE 59 

the highest rate for time loans on stock exchange col- 
lateral and the range of rates on choice double name com- 
mercial paper for 60 to 90 days. 

A drain on reserves precedes a panic, and this drain 
is unlikely to cease till the panic's very end, when the 
situation is relieved by a drastic clearing up. Money 
rates are thus apt to be at their highest at the very 
height of a financial crisis, as in the Fall of 1907. But 
it does not follow in general that because rates are 
high, the stock market must immediately turn. Specu- 
lators can pay high rates if they wish, just as long as 
the banks will lend on the collateral tendered. Again, 
the coming of easy money may be ''discounted" by 
speculators, willing to pay, temporarily, very high 
rates — witness the instance of December, 1905. Once 
more, the size of the surplus deposits or of the surplus 
reserves may suggest the coming of very high rates 
and of much calling of loans, and speculators on the 
long side of the market may get out of their commit- 
ments and onto the short side before the arrival -of the 
conditions which they foresee. Money rates, by them- 
selves, are more often the symptom of the momentary 
condition of the banks than they are any sure sign, 
either of an immediate expansion or contraction of 
credit or of stock market movements. 

When the lending power of banks grows less, the 
stress of the situation is apt to fall on wealthy inter- 
ests —estopping their plans of finance or reorganiza- 
tion and preventing them from taking up new ones. 



6o STOCK PRICES 

The speculation in the early Fall of 1902, engineered 
by Messrs. Talbot J. Taylor & Co. in Southern Pacific 
and by Mr. John W. Gates and associates in St. Paul 
and other stocks, came to an end through the inability 
of the speculators to secure further loans from the 
banks. *'The demands, both of legitimate business 
and of the speculators,'' says Mr. Henry Hall in his 
study of "Two Stock Market Culminations," *'had 
utterly exhausted the loaning power of the American 
banks. Five brokerage houses in New York had alone 
borrowed $100,000,000. Mr. Gates hurried to London, 
in September, hoping to secure further advances of 
money at that center to go on with the bull campaign. 
He was unsuccessful. At the New York Clearing 
House banks, surplus deposits had fallen from $98,- 
000,000 in 1901 to $1,300,000 in September, 1902, going 
below zero the next month. Surplus reserves had van- 
ished; and there was an actual deficit in the week end- 
ing September 20. The natural consequence was tight 
money. Call loans touched 8, 20, 20, 25 and 35 per 
cent in successive weeks, and for time loans 7 per cent 
was demanded." This was the beginning of the great 
decline of 1903. 

Again, in the same brochure, the same writer pro- 
ceeds as follows : "In the Fall of 1906 the position of 
the banks was frightfully strained. Call money touched 
from 12 to 36 per cent in every week in November and 
December, and while stocks reacted in consequence, 
in the latter months of 1906, eminent financiers refused 



BANKS AND THE EXCHANGE 6i 

to believe that the bull market had ended, or lay aside 
their plans for railroad deals of various sorts. They 
made a diligent effort to induce President Roosevelt 
to modify his hostility to corporations or to issue some 
statement, which would reassure investors. They also 
tried to secure an emergency currency law. Failing in 
both completely, they finally resolved definitely to let 
matters tak^ their course. In 1907, a few more promi- 
nent corporations increased their dividends and 
manipulation wUs continued, all for the purpose of 
holding the market as strong as possible, but mean- 
while there was a quiet but persistent and tremendous 
unloading of stocks by pools, inside interests and mar- 
ket operators'' — prior to the great fall of the year 
which, to a greater or less degree, they foresaw. 

As the relation of the banks to the Exchange is at 
the very bottom of an understanding of the stock mar- 
ket, it may be well to recapitulate the argument of 
the present chapter. A b^nk loan is a loan of credit 
based on goods sold, on personal responsibility or on 
collateral. Bank loans in Xew York are limited by the 
provision which compels the national banks to keep in 
money 25 per cent of their deposits. As New York 
is the market pw excellence for securities, the 
Xew York banks are the first to be put in a posi- 
tion where it is difficult for them to add to their loans. 
The amount of surplus reserves and of the surplus of 
deposits over loans are the best indices to their condi- 
tion. When surplus reserves are high, call money is 



62 STOCK PRICES 

apt to be easy; when low or minus, call money is very 
likely to be high. The daily settlements and clear- 
ances on the Exchange, call loans, valuation of stocks 
on the basis of current exchange quotations, and the 
necessity for the banks to keep a 25 per cent reserve — 
all act together to bring about the peculiar conditions 
under which a stock boom and a stock collapse occur. 
When a drastic financial situation rights itself without the 
infliction of grave commercial losses, the business contrac- 
tion will be much less severe than might have been looked 
for from the decline in stock prices. This was the case 
in 1904 following the 1903 collapse in the stock market. 

It is thus evident, with our present bank methods 
in New York of investing the bulk of bank commitments 
in loans on stock, rather than in commercial discounts, 
as in Europe, that our great overdone bull and bear mar- 
kets are to be expected recurrently, tinless an elimination 
is made of the practice of extending bank credits merely 
on the basis of exchange quotations instead of lending 
on the basis of conservative appraisement, as with all 
other sorts of security. A change of this latter sort 
would, in the end, mean that brokerage houses would 
have to demand larger margins from customers than 
now, to cover part of the sums now advanced on the 
shares by the banks. 

As conditions now stand, inflation of financial loans 
enhances stock prices; deflation reduces them. By an 
extension of over-liberal credit on stock collateral, the 
banks bring about a boom ; by its withdrawal, they 
necessitate a collapse. 



BANKS AXD THE 

Highest 
call loans 

ou Exchange. 
1900 

Jan 12 

Feb 3 

Mar 7 

Apr 5 

May 3 

June 2 

July 2 

Aug 2 

Sept 2 

Oct ti 

Nov 2o 

Dec 61/2 

1901 

Jan G 

Feb. ... ly. 

Mar 3 

Apr 7 

May 75 

June 15 

July 25 

Aug 4 

Sept 10 

Oct 41/, 

Nov 5 

Dec 12 

1902 

Jan 15 

Feb 3 

Mar 5 

Apr 7 



EXCHANGE 




63 




Range on 


Highest 


choice double 


time 


name 


\ paper 


loans. 


60 to 90 days. 


6 


4 


to 6 


5 


4 


to 41/4 


5 


4% 


to 5 


4 


4 


to 4y3 


4 


3y2 


to 4 


4K^ 


3y2 


to 4 


4y2 


334 


to 4y2 


4y2 


4 


to 4.1/2 


4y2 


4 


to 5 


5 


5 


to 5ya 


5 


4/2 


to 5 


5 


41/4 


to 5 


4% 


31/2 


to 5 


4 


3y2 


to 4 


4 


31/2 


to 4 


4y2 


3% 


to 4 


5 


334 


to 4 


4 


3T^ 


to 4y2 


5 


4 


to 4y2 


5 


41/2 




sy^ 


4J4 


to 5 


5 


4y2 


to 4^ 


5 


41/2 


to 3 


5y2 


5 




sy^ 


•I 


to 5 


4/2 


4 




434 


4 


to 5 


4H 


4 


to 5 



64 STOCK PRICES 



Highest 
call loans 
on Exchange. 

1902. 

May 25 

June 5 

July 7 

Aug 5% 

Sept 25 

Oct 35 

Nov 7 

Dec 13 

1903 

Jan 15 

Feb .• 4 

Mar 8 

Apr 15 

May 3 

June 414 

July 10 

Aug. h/2 

Sept 3 

Oct 5 

Nov 9 

Dec 9 

1904 

Jan 6 

Feb 2 

Mar 2 

Apr l3^ 

May 21/4 

June 1% 

July 11/2 

Aug 11/4 





Range on 


Highest 


choice double 


time 


name paper 


loans. 


60 to 90 days. 


5 


41/4 to 454 


5 


4 to 4^ 


5 


41/2 to 5 


5% 


41^ to 5 


7 


^5 to 6 


7 


^SVs to 6 





51/2 to 6 


6 


*6 


6 


4J4 to 6 


5 


4^ to 514 


6 


51^ to 6% 


534 


5 to 5% 


Wa 


41/2 to 5 


W2 


5 to 51/2 


31/2 to 6 


5 to 5)4 


6 


5)4 to 6 


6 


6 


51/4 


51/3 to 6 


6 


5J4 to 6 


6 


51/3 to 6 


5 


41/2 to 51/4 


4/2 


41/2 to 5 


41/3 


41/3 to 5 


4 


33/4 to 41/2 


4% 


33/4 to 41/4 


3% 


31/2 to 41/4 


a% 


31/2 to 334 


3% 


31/2 to 4 



BAXKS AXD THE EXCHAXGE 65 



Highest 
call loans 
on Exchange. 

1904 

Sept 21/0 

Oct. . ...■ 2% 

Xov 4 

Dec 5 

1905 

Jan 31/2 

Feb 3 

:Nrar 4 

Apr 7 

May 31/4 

June 

July 31/3 

Aug 3 

Sept 7 

Oct 8 

Xov 25 

Dec 125 

1008. 

Jan. ()0 

Feb. 8 

Mar. 9 

Apr. 30 

.Afay 12 

June 

July 8 

Aug. 12 

Sept 40 

Oct 9 

Nov 27 

Dec 30 





Range on 


Highest 


choice 


! double 


time 


name paper 


loans. 


60 to 90 days. 


4 


33/4 


to 43/4 


4 


4 


to 43/4 


4 


3% 


to 4% 


4 


4 


to 4yo 


3yo 


43/4 


to 6 


3% 


43/4 


to dV4^ 


4 


SVs 


to 6 


4 


5 


to 5% 


4 


472 


to 5 


4 


5 


to 5y2 


4y4 


5 


to 53/4 


4 


5% 


to 6 


4% 


6 




43/4 


sy^ 


to 6 


6 


53/4 


to 6 





5% 


to 6 


8% 


43/4 


to 5V2 


5M> 


4% 


to 5 


5% 


5 


to sys 





43/4 


to 53/4 


■>% 


43/4 


to G 


r,y4 


5 


to 5y2 





5 


to 53/4 





^V2 


to 7 


TV. 


G 


to 7 


0% 





to 7 


01/2 


6 


to ey. 


4 


C 


to oy^ 



66 STOCK PRICES 

Range on 

Highest Highest choice double 

call loans time name paper 

on Exchange. loans. 60 to 90 days. 
1907. 

Jan 45 7 5% to 6% 

Feb 6 5% 5% to 61/4 

Mar 25 8 61/3 

Apr 41/3 5 5% to 6 

May 4 4% 51/3 to 6 

June 12 6 51/0 to 6 

July 16 51/3 to 6 

Aug 6 7 6 to 61/3 

Sept 61/3 6 61/3 to 7 

Oct 125 7 *7 to 71/3 

Nov 75 16 *7 to 8 

Dee 25 18 t8 

*Mostly nominal. tPractically no business. 

1908. 

Jan 20 7 

Feb 21/4 51/4 

Mar 21/4 5 

Apr 2 5 

May 2 4% 

June 1% 41/4 

July 134 4 

Aug 11/4 4 

'Sept 21/3 354 

Oct 2 4 

Nov 3 4 

Dec 41/3 4 

1909. 

Jan 3 31/3 

Feb 3 31/3 



51/2 


to 7% 


4% 


to 51/2 


5% 


to 6 


4 


to 51/4 


3% 


to 4 


3% 


to 3% 


3% 


to 4 


3 


to 4 


3% 


to 4 


4 


to 4% 


31/2 


to 4% 


3% 


to 4 


m 


to 4 


3% 


to 3% 



BANKS AND THE 

Highest 

call loans 

on Exchange 

1909. 

Mar 21/2 

Apr 2% 

May 21/3 

June 23^ 

July 2 

Aug IVz 

Sept 3 

Oct 6 

Xov 6 

Dec 7 

1910. 

Jan 14 

Feb 3 

]Mar 31/4 

Apr 7 

May 6 

June 3^ 

July 3 

Aug 2 

Sept 3 

Oct 4 

Nov 43^ 

Dec 7 



EXCHAXGE 




(>i 




Range on 


Highest 


choice 


double 


time 


name paper 


loans. 


60 to 90 days. 


3% 


3y4 


to 372 


3/2 


3 


to 33/4 


334 


3 


to 3^ 


3% 


3 


to 372 


334 


3 


to 3y2 


4 


4 


to 470 


5 


334 to 4y2 


5 


4% 


to 572 


sy^ 


5 


to 5^ 


5 


4% 


to 574 


4% 


4y2 


to 5 


41/4 


4 


to 434 


4y2 


4 


to 5 


5 


4y4 


to 5 


5 


4y2 


to 5 


434 


4y. 


to 5 


sy^ 


5 


to 534 


5 


5 


to 534 


5 


574 


to 6 


5 


5y4 


to 


574 


434 


to 6 


4y4 


4 


to 574 



VI. 
The Floating Supply 

The floating supply of a stock may be best defined as 
that part of the outstanding capitaHzation which is held 
for a speculative advance. Its amount in the market 
varies with each change in quotations ; some stock not for 
sale at the current price may come out a point or two 
above, or be forced out, from lack of margin, a point or 
two below, while still other shares vv^ill require a fluctua- 
tion of many points before they are for sale. In general, 
the floating supply may be taken to be all stock outstand- 
ing except that held for investment purposes, whether it 
be dividend paying or whether dividends are merely hoped 
for, and except that further portion of stock held for 
purposes of control. As 'here defined, probably most of 
the floating supply of listed stocks is carried on a margin 
with brokers or is pledged at banks, though some of it is 
held outright; on the other hand, of the fixed supply — 
that held for investment or control — a portion also is to be 
considered as always in pledge. 

In some stocks the floating supply is very small; in 
others it comprises all the shares except the few held for 
purposes of control. Figures at all exact on this subject 
are, as a rule, known only to the general officers and direc- 
tors of a road and those whom they may choose to take 

68 





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199 




































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193 




































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197 




































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196 




































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192 












































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191 
















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188 














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187 














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186 
































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186 
184 
182 
162 
181 
180 
179 

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117 






















































176 






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175 




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174 






















































173 










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172 






















































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PAT2S:. 


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3 


7 S 


9 


10 


11 


12 


14 


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4 



RISE OF CHICAGO, ROCK ISLAND &. PACIFIC IN 1902. 



70 STOCK PRICES 

into their confidence. Not that they are always known to 
them, for sometimes stock, even for investment, changes 
hands without transfer on the company's books. Never- 
theless, while exact figures on this matter are out of the 
question, something approximate may be sometimes 
guessed at. Thus, from the large number of investors in 
Standard Oil stock it may be inferred that its fixed capital- 
ization is large and its floating supply relatively very 
small, while from the vast dealings in such stocks as 
Reading in recent times and St. Paul some years ago, it 
mig^ht be conjectured that a very large amount of these 
stocks was afloat in the Street. 

It is often said that a stock closely held is easy to mark 
up; and, taken literally, the statement is true, for if there 
are few outsiders' shares to come to the market for sale, 
it is obvious that it must be easy for the manipulators to 
mark up the price of such as they possess by the simple 
expedient of a few matched orders. But in practice the 
facts do not work out this way. It will be found that a 
stock is rarely manipulated upwards unless its floating 
supply is quite large in amount, whether or not it be also 
relatively large to the amount of the fixed supply. True, 
a stock with a small, closely held floating supply is easy to 
mark up. But then to whose advantage is it? On the 
hypothesis, those responsible for the manipulation can 
accumulate at the start little more of the stock than they 
already own, so that their object, if the stock have no in- 
vestment value, is simply to dispose of their own holdings. 
But if the number of shares of the stock is small this is 



THE FLOATING SUPPLY 71 

hard to do at the top prices ; the same certificates, to make 
anything Hke a market, have to be sold over and over 
again ; room traders and brokers' customers are alike shy 
of the stock ; violent fluctuations occur on any attempt to 
liquidate by an outsider who has purchased a certain 
amount, and not infrequently the whole boom goes to utter 
collapse at the top through the efforts of some green 
insider to get the public to relieve him of his holdings. 

On the other hand, a stock whose floating supply is 
small, because the shares have a high investment value, 
presents another situation, but one also which tends to 
prevent manipulation of a successful sort. An attempt to 
bull a stock of this sort results in one of two things. If 
the stock is very high grade the manipulators may mark 
up the price without reaction of large moment, as w^as 
done some years since in Lackawanna; here the price 
touched at once the figure which, had the stock been left to 
the ordinary demand of investors, it would have reached 
anyway, though no doubt much later on. But in this 
situation what the manipulators have for sale is too scanty 
in amount for them to make much out of it, nor can they 
hope to interest the public to any extent into buying a 
high-grade investment stock at the very high price it has 
reached. In the second case, mentioned above, if the stock 
has simply a very large number of investors who own a 
large percentage of its shares, then it will be hard in this 
case, also, for the manipulators to accumulate a good-sized 
line to dispose of except at prices higher than they want 
to give: besides this, as the bulling is apt to bring stock 



72 STOCK PRICES 

from unexpected sources, both investment and speculative, 
on the market, the pool may have to buy at the prices to 
wrhich they have put the shares, more than they feel like 
taking care of. The first thing in all manipulation for the 
rise is to clean up the floating supply or to see that it is 
tied tip so as not to come prematurely to market ; but in 
the case of a stock like Pennsylvania this is impossible. 
Thus a stock with a large fixed supply held by many in- 
vestors offers little attraction to a syndicate which thinks 
of manipulating it. For these reasons Pennsylvania stock, 
the last and slowest to go down in a panic, is one of the 
hardest to put up rapidly in a bull market. (See chart.) 
Shares closely held may be kept at prices which seem 
hardly justified by the conditions ; provided that the hold- 
ers generally are inclined, as they sometimes are when few 
in number, to acquiese in the valuation and not to sell. This 
explains the prices at present of Lackawanna and of Lake 
Shore. Something of the same sort in the past has been 
the case with the stocks of the Chicago & Northwestern, 
the Great Northern, the Northern Pacific and the New 
York, New Haven and Hartford among railroads and the 
General Electric among industrials. New York, New 
Haven and Hartford has paid 8 per cent yearly for many 
years past. In 1902 it rose to 255 in April; since then it 
has fallen steadily and now sells at about 140. Its capitaliza- 
tion has increased from 80 millions in 1900 to over 300 
millions by 1910. So, Northwestern in 1902 sold at 270, 
though then paying 7 per cent as now. There has been an 
increase of 80 millions in its securities. Seven per cent 



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THE FLO ATI XG SUPPLY M 

Great Northern in February, 1906, rose to 348 and, later 
on, in September, to 341. Seven per cent Northern Pacific 
in the same year rose to 232^. General Electric, then as 
now, an 8 per cent stock, rose in 1902 to 334. None of 
these extreme rises would have been possible save through 
banking aid extended (as described in Chapter V) to the 
interests bulling these stocks. 

St. Paul 'Used to be one of the easiest of all stocks to 
manipulate. The investment holdings of it were not well 
distributed, but confined to a few^ wealthy interests whose 
investment stock did not come readily to market. More- 
over, the great owners were, also, to a large extent those 
interested in the ''rigging." The same men or their lieu- 
tenants, who owned great blocks of the stock, would accu- 
mulate a large line of that floating in the Street ; this was 
advanced rapidly in price, and then it and as much of the 
original holdings as desired were disposed of to outsiders 
whose hopes had been raised to a high pitch for all sorts 
of melons to come. As this process of accumulation and 
distribution of St. Paul was done time and again, a cer- 
tain amount of the stock each time passed into bona fide 
investment hands and was taken oflf the market. Less 
and less of the stock was left floating, and with the devel- 
opment of the road the shares gradually lost much of 
their market importance, which is now held by Union 
Pacific and Reading. In general, it may be stated that 
a good corporation stock is likely to become increasingly 
difficult to manioulate as time goes on, because the float- 
ing supply, which furnishes the profits to pools, becomes 



74 STOCK PRICES 

smaller and smaller and because the investment supply 
has become very large (as in the case of Pennsylvania). 
As a country increases in wealth, the stocks and bonds of 
established corporations tend to belong entirely to the in- 
vesting classes and to be kept out of the speculative 
market. 

While at the top of an advance the floating supply in 
the Street becomes small, because 'distributed among the 
public, which usually retain some of it permanently if the 
stock be of real value, at the bottom of the market, on 
the other hand, and at various intermediate points, the 
shares held by outsiders were partly acquired by them 
at the top in the hopes of a farther rise. The owners of 
such shares, which are •usually -carried on margin, grad- 
ually part with their high-priced stock in disgust, as quo- 
tations pursue their downward course. But stock of this 
sort does not, as a rule, lodge at once in the hands of 
those strong enough to hold it till another advance is 
engineered. Such shares are for the time being more 
likely to be absorbel 'by floor traders on the exchange, by 
other speculators or by investors. When the bottom has 
at length been reached the accumulative process may be- 
gin again, either then or later. 

Manipulated stocks like Reading and Union Pacific at 
present and St. Paul in the past move over a much wider 
range than those which are not or cannot be taken in hand 
by speculative pools. The former go much higher in a 
bull market and much lower in a bear market than the 
latter. Thus the difference between the low prices of 



THE FLOATIXG SUPPLY 75 

1907 and the high prices of 1908 was 85 points for Union 
Pacific, ^2 for Reading, 60 for Southern Pacific and 59 
for St. Paul (this stock being still speculative in its move- 
ments) ; while for Pennsylvania the difference was 28^^/2 
points and for Xew York Central 27. Of course, the 
volume of sales in a manipulated stock greatly exceeds 
that in stocks moving more normally: in 1908 the sales 
of Union Pacific were 21,100.000 shares, of Reading 
35,300.000. and of Southern Pacific 8.800,000, while of 
Pennsylvania they were but 4,100.000 and of Xew York 
Central 1,800,000. 

Thus it would seem that to be a speculative favorite a 
stock should have a large floating supply and should be 
held by but few investors. This explains the dift'erence 
in the movements of Reading and Union Pacific on the 
one hand and of Xew York Central and Pennsylvania on 
the other, for it may be put down as sure that these two 
well-known stocks would be natural market leaders if it 
were possible to make them so. It may be thought 
strange that Reading is not largely held by investors, but 
as a matter of fact this road has never recovered the 
prestige it once had with the small investors ; especially in 
Pennsylvania, where the stock would find a natural lodg- 
ing place, are its past failures held in memory. 

It is worth noticing that in an advancing market a con- 
ser\'ative stock like Pennsylvania is practically certain to 
show a small gain for the buyer who wants but little risk. 
For speculation on a small margin it is hard to pick a 
much surer stock tlian one of this character, unless, in- 



76 STOCK PRICES 

deed, a very low priced one is chosen, where, however, the 
danger of adverse fluctuations is ahnost as great, count- 
ing by points and is greater, counting by percentages. 
High grade, slow moving stocks have also the ad- 
vantage that they are rarely influenced by special 
causes and that when they are so, as by a new 
stock issue, the matter is soon public. The man witjh 
$5,000 with which to speculate who buys Pennsylvania on 
a ten point margin in the hopes of a five point rise is 
wiser than he who buys Union Pacific on the same size 
margin looking for a ten or fifteen point profit. The lat- 
ter may, to be sure, make largely, but he takes unwise 
risks; the former, if careful at all, can hardly, at the 
worst, lose more than a point or two and stands a good 
chance to make a profit. 

Dealing, therefore, in a stock of large capitalization, 
held largely by investors, and with a floating supply small 
as compared with that of other stocks of equal or nearly 
equal capitalization and prestige, affords one of the safest 
opportunities for the man whose margin is small, meas- 
ured either by what is in his brokers hands or by his 
whole available capital. For these reasons, Pennsylvania, 
and a very few other stocks offer peculiar advantages 
to the small speculator of conservative ways of thinking. 



VII. 

Manipulation 

As a rule, speculative buying when successful involves 
awaiting a favorable opportunity to make purchases 
cheap and speculative selling awaiting a time to sell 
when market prices are high. \Mien, however, a specu- 
lator, or a coterie of speculators, not content with such 
waiting methods, endeavor to bring about cheap prices 
for stock they wish to buy and high prices for stock they 
wish to sell, we have what is called ''manipulation" in 
America, in England, ''rigging the market." The popu- 
lar impression as to the immense importance which pro- 
ceedings to these ends possess is apt to be exaggerated. 
A speculative purchase may be the same in amount 
whether made by many speculators personally unknown 
to one another, but who are, each of them, on the right 
side of the market, or whether made by all in concert 
and knowingly. The traders who are right in unison are 
likely to be right separately. The momentum of manipu- 
lative buying in a stock may be resolved into the separate 
upward thrusts which otherwise might have been made 
separately, and which, in any event, would probably have 
been made in some securities with the same general up- 
ward effect on the market as a whole. The importance of 
manipulation lies in the selection of a stock for accumula- 

n 



78 STOCK PRICES 

tion at low figures and in its distribution at higher figures 
and in the fitting times to make such purchases and sales. 
It also depends on the general methods by which the im- 
pression is given the public that they should 'buy when the 
manipulators wish to sell and sell when they wish to buy. 

Speculative tactics of the first sort usually have their 
expression through a pool in a stock, where a number of 
separate traders or, occasionally, firms and financial in- 
terests, agree to be responsible for such a number of 
shares of the security in question, the prices at which and 
the time when the shares are to be purchased and sold 
being generally left to the discretion of one or of a few 
members of the pool supposed to be versed in market 
matters. Sometimes the stock has only to be quietly 
bought up, the promoters of the deal taking all oflferings 
of the shares but not bidding for any stock till it becomes 
evident that at the particular range of quotations obtain- 
ing, no more of the shares are for sale. Bids at slowly 
rising prices are then put in till the requisite number of 
shares are obtained or until it is evident that no more can 
be accumulated at sufficiently low prices. Sometimes, 
however, the shares have not to be bought in the market 
at all. They may be already the property of members of 
the pool given them at the organization of the corpora- 
tion or for services, later on, of some sort or another. 
Or they may simply be shares which have been long in 
the possession of the owners without having found the 
ready market which it is now desired to create. 

In other cases, to obtain a large holding of shares it 



MAXIPULATIOX 79 

may be necessary to make the present Iiolders sell. The 
stock as it stands may be too high priced to be worth the 
expense of accumulating. To reduce the price of a stock 
for this purpose, a judicious amount of short selling ap- 
pears, and if 'the manipulators 'have control of the com- 
pany, its dividends may be cut, hands laid oflf or even the 
plant s'hut down, till the public, alarmed and disgusted 
with the course of things, throws its shares on the mar- 
ket for what they will bring. 

But, however procured, the distribution of a line of 
stock means exciting interest in the public in •connection 
v.ith that stock. The methods of doing this are manifold. 
In the end, however diversified, they amount to creating 
a market appearance of activity 'and strength in the stock, 
which in the end will lead the public to buy "heavily in 
the hope of still higher prices. It is worth noticing that 
neither strength nor activity by itself will lead the public 
into the -market ; the two must be combined. This is a 
fact which has not infrequently been forgotten by would- 
be manipulators with the laudable but impracticable in- 
tention of husbanding their resources and making no 
more fictitious purchases and sales than seem necessary 
to keep the stock in public view. The attempt, some 
years ago, to arouse a market for the shares of the 
American Ice Securities Company failed for this reason. 
The advance in the stock price was steady, continued and 
without any dangerous reactions fitted to scare the public 
off. But the trading was too scanty and the efifect given 
was exactly what should have been most concealed, viz., 



8o STOCK PRICES 

that the shares were the plaything of a very small coterie 
who could do with their price whatever was wanted. The 
stock which touched 97% in December, 1906, fell to Syi 
in October the next year, and has hovered in the twenties 
and thirties most of the time since then. 

During the upward course of a stock, dividends, if 
possible, may be increased, rosy reports made of earn- 
ings and in every possible way the public incited to buy 
the quickly boomang property. When a large and broad 
market is made for the stock, w^hen the public is coming 
more and more into the security with buying orders, en- 
thusiastic about the very high prices soon to exist — at 
such time the members of the pool sell. 

Speculative pools in important stocks arise only when 
the general market itself has an upward trend. This is 
also true to a very great extent of pools in smaller stocks, 
such exceptions to it as have occurred having done so 
chiefly through the ill-timed judgment of their sponsors. 
To endeavor to buy cheaply in a raging bull market is im- 
possible; not less so is it to sell dear amid generally de- 
pressed -prices of other securities. The whole market 
moves very much -as a unit ; the differences between vari- 
ous stocks being not that they move at the same time in 
opposite directions, but that one moves faster than an- 
other in the same direction. Pools may be regarded not 
so much as causes of this general market movement as 
specialized expressions of the character of its speculative 
activity. If there were no pools, the present members 
would still exert their financial strength in the market, 



MAXIPULATIOX 8i 

though, it may be, possibly in other directions. A pool 
simply concentrates financial power into one channel and 
uses it for a definite, fixed purpose with less waste than 
would be incurred through the disjointed efforts of many 
individuals. 

^lanipulation, in the sense of the conscious direction, 
by concerted holders, of capital exists at almost all times 
in the market to a greater or less extent. But it exists 
successfully only in so far as the manipulators correctly 
foresee the general tendencies of the future. Interest 
for any length of time cannot be excited in a stock which 
has no real future before it. The facts leak 'Out. Add to 
this, that with great corporations their conditions nowa- 
days can be concealed only up to a certain point, though 
it must be confessed, from certain events in the last few 
years, that this concealment can take place to an extent 
which one would be inclined to think impossible without 
knowledge of the actual facts. 

In a successful manipulation, it is not exactly true 
that the public are deceived. To a large extent, they 
deceive themselves, -with hopes of vast dividends, melons, 
and so on ; though, no doubt, the sponsors of a market 
movement count on this very self-deception occurring. 
The public think the shares will have very much higher 
prices and would not buy except as laboring under this 
delusion. Even when the public happen to buy at prices 
fair from an investment standpoint or as representing 
the equity of the shares in the total gross valuation of the 
concern, the manipulators accumulated the shares at 
prices very much lower. 



82 STOCK PRICES 

In the case of certain stocks the public almost year after 
year buy at the high prices what the same interests or 
their successors buy at lower figures. The stock of the 
American Sugar Refining Company used to go through 
upward and downward movements with extreme regu- 
larity, though with much wider swings one time than 
another. For years past Brooklyn Rapid Transit has per- 
formed similar evolutions; at times the distribution was 
in the year following the accumulation. There are very 
few stocks of which a chart from 1899 to 1909 presents 
such an odd appearance to those conversant with market 
movements. The object of the manipulators seems to 
have been, to obtain at least 15 to 20 points profit each 
year. The whole gist of the matter is that manipulators 
take advantage of the tendency on the part of the public 
to buy on the basis of present conditions, that is, not to 
speculate, *'look ahead," at all. 

Manipulative activity explains the tendency in a rising 
market for stocks to go up one or two rapidly at a time, 
instead of all together. The chief speculative coteries are 
at the moment dominant in the stocks whose prices are 
quickly advancing. Very frequently, a group of the same 
traders, particularly of those very wealthy coteries known 
popularly as the "Standard Oil crowd," the "Union 
Pacific following," the "Morgan interests," and so on, 
will, with the aid of the banks as described in Chapter V, 
put up the price of one stock after another, when they 
expect that the public will shortly become interested in 
the market. In these cases, it is the higher grade stocks 
which move first. 



MANIPULATION 83 

In the case of the activity of these great interests, man- 
ipulative tactics sometimes take on a different form. The 
principle of allowing the public to deceive themselves is 
applied in a more subtle form. For example: From 
the beginning till now, aft'airs of the United States Steel 
Corporation have been conducted in a manner above 
board ; yet, the public bought the stocks at the outset, in 
1901, with the idea that dividends would be paid straight 
on. Few experienced persons in the steel business be- 
lieved this to be possible in connection with the common 
shares, but, likewise, no one of importance in the business, 
proclaimed this belief. On the contrary, the '^insiders" 
sold their stock at the high prices made possible by the 
belief, and, afterwards, when the price of both sorts of 
shares had fallen immensely, bought them back for a song 
and waited serenely for the trade revival, then already on 
the way. In other cases, the manipulation off the Ex- 
change has been more directly deceptive. Of very few 
important shares is this truer than of those of the 
Amalgamated Copper Company in 1901 and 1902. 

It might be enquired what would be the result if the 
public became practically familiar with the situation in 
Wall Street. The only answer can be that the processes 
of accumulation and distribution would be confined to a 
much smaller range of prices and that the quotations for 
stocks would, consequently, not fluctuate so far as they 
now do from the central figure which may be regarded as 
giving a fair idea of their value. But it does not appear 
that such familiarity will obtain. Haphazard speculators 



84 STOCK PRICES 

are, many of them, quite capable of understanding the 
facts of the situation ; but they fail to identify the phases 
of such situation when, afterwards, it presents itself to 
them anew. 

Manipulation in stocks which are not traded in on the 
great exchanges differs necessarily in some important 
features from such as obtains in the case of listed securi- 
ties. In the former instance, the manipulators can rarely 
obtain much assistance from banks; they have, conse- 
quently, to bear the brunt of the financing themselves. 
Manipulation oflF the exchanges, therefore, is almost al- 
ways confined to stocks of rather small capitalizations, 
unless, of course, the capitalization be a merely nominal 
one. As the pool can obtain nothing like the percentage 
of profit on its holdings for the same size rise as it would 
have obtained had the burden been largely borne by the 
banks (which would have allowed the purchase of many 
more shares), it follows that speculative coteries in such 
shares nearly always endeavor to put them to extreme 
price heights, to make, in this way, a good sized profit. 
As they can carry only few shares, they try to get the 
biggest sort of a gain on each. In such cases it should 
be noted there are no marginal accounts to be quickly dis- 
turbed. Consequently, as long as a general fright does 
not occur, markets of this sort are apt to rise to heights 
unheard of in similar situations on the exchange. The 
New York Curb has witnessed some sensational flights in 
the prices of stocks which had little or no collateral value 
with banks, and which pools and public alike had, there- 



MAXIPULATIOX 85 

fore, to carry outright or almost so. In 1906, the price 
of the Xipissing shares was run up from par at $5 to 
about $34 — an increase of nearly 600%. Flights almost 
equally as wild were performed about the same time by 
other Cobalt shares. Lawson's campaigns in some mining 
stocks are also worth notice here. In the year just men- 
tioned the price of Trinity ($25 par) shot up from $10 to 
$40 in a few weeks — a rise of about 300%. In this rise 
it should be noted that the well-known speculator in- 
structed his followers to buy for cash only, and that, as a 
matter of fact, so great was the suspicion of ]\Ir. Lawson 
in brokerage and banking circles in New York as well as 
elsewhere, that it was almost impossible, in many places 
totally so, to buy any other way. 

It thus appears that the differences between marginal 
and non-marginal markets and between manipulation in 
the two depend on the way the floating supply of shares 
is carried in each case. 



VIII. 

Rising and Falling Markets 

It was pointed out, years ago, by the late Charles H. 
Dow, that market movements divide themselves into 
three classes as regards length and duration of upward 
and downward swings ; there are, first, the great swings, 
Luch as those from September, 1900, to August, 1902, or 
from 1904 to 1906, which rarely cover a period of less 
than a year or two and are sometimes longer. Then, 
there are the shorter swings of a month, two, three or 
more months, such as may be seen in plenty between May, 
1901, and August, 1902, in the generally rising bull mar- 
ket. Finally, there are the minor variations from day to 
day, which form part of the secondary swings, just re- 
ferred to, in the same manner as they form part of the 
great primary swings. No doubt, smaller fluctuations, or 
swings of a few hours or a day's movement could be 
fitted into the tertiary swings as they are into the 
secondary. The whole appearance of the market from 
year to year might be compared to the waves of the ocean 
where the great waves are crossed by smaller ones which, 
again, are swept by lesser ones and so on down to minute 
and scarcely perceptible wavelets. The primary swings 
mean movements in the market in one direction of fifteen, 
twenty, thirty or more points, the secondary of four, six. 



RISING AXD FALLIXG MARKETS S? 

eight or more points. The day-to-day variations within 
these secondary swings, are of a point to a few points — 
very often mere reactions from the course of the sec- 
ondary swings which they follow. Of course, it should 
be understood that large secondary swings may occur 
within a day or two or even within a few hours, as wit- 
ness the two hours' panic on ^lay 9, 1901. 

It is worth notice that the market swings are now much 
more extended than they were years ago and that the 
great swings in the eighties and nineties are barely the 
size of our secondary swings. This is because the general 
price level of stocks was then much lower. There were 
then no great railroad stocks selling over $200 a share 
and very few selling at par, while the great majority were 
much below. 

In considering the peculiarities of bull and bear mar- 
kets, a careful distinction should be made between an up- 
ward secondary swing which is a rally in a bear market 
(as in April, 1903 or in ^March and April, 1907,) and a 
great, upward, primary swing, such as that which ran 
from the end of 1907 to August, 1909. At the end of 
a secondary swing in the same direction as, and a 
part of, its primary swing, a reaction of about one-half to 
three-quarters of its extent usually occurs in the oppo- 
site direction. For examples see (on the charts in Chap- 
ter IX) the rallies in March and in March- April, 1907, 
that in June and that in August of the same year; in an 
advancing market, that of October, 1906, and September/ 
1905, May- June. 1908, and August-September of the same 



88 STOCK PRICES 

year. It will be observed that such reactions are some- 
times broken by short tertiary swings within th^nselves 
in the direction of the primary movement. It should, 
further, be observed that a reaction at the top of a move- 
ment may pass into the beginning of a swing in the oppo- 
site direction, whether such swing be of primary or of 
secondary duration. Thus, in September, 1902, and in 
October, 1906, the recession passed into the beginning of 
the great downward swings of 1903 and 1907, respec- 
tively. The forces dominating the market have changed 
in character. It was noticed in a previous chapter that 
this reversal of the character of the market was usually 
preceded by dullness after a falling market, but accom- 
panied by activity in a rising market. In other words, 
bear markets may follow at once on the heels of a culmin- 
ation of a bull movement, but this is not so of a bu^ 
market following on a bear. 

To understand why these differences should subsist 
between bull and bear markets and to get a better under- 
standing of what is, after all, the greatest difference from 
the speculator's standpoint, it will be necessary to exam- 
ine somewhat closely the function of short selling in the 
market. 

Short selling represents the views of the conservative 
interests in the market. It is a brake on undue inflation, 
the check which halts a too rapid speculative rise. Com- 
mission house customers, individual financiers and great 
financial interests are relatively seldom short sellers ; the 
customer because he lacks courage and knowledge and 




RISING AXD FALLIXG MARKETS 89 

the large financial interests because speculation is but an 
adjunct to the flotation and distribution of the shares of 
their enterprises, and, consequently, their primary aim is 
to enhance, not to depress prices. Of course, great finan- 
ciers have at times allowed or encouraged a depression, 
whether long or short, with the object, or, at least, the 
intention, of taking back shares at lower prices, them- 
selves. 

Xor, save sometimes at the end of a long decline, are 
brokers given to encouraging short selling by their clients. 
To encourage it, is to favor pessimism, and experience 
has shown that the chief result of a firm's encouraging 
pessimistic feeling is simply to keep its own customers 
from trading at all. 

The most obvious thing connected with short selling is 
the small number of persons engaged in it at any one 
time whatever, compared with the number of those w^ho 
are bulls at nearly any time. The chronic short sellers 
are, in fact, limited to those members of the exchange 
who are room traders and to a certain, probably small, 
proportion of the professional and semi-professional 
traders. 

In a steady market, therefore ; in an advancing market ; 
and, almost always, even in a declining market (unless 
the decline has long progressed), those long of stocks 
greatly outnumber (with much larger aggregate of com- 
mitments in shares) those short, the former class compris- 
ing, as it does, not only all speculators for the rise but 
the great army of investors. Hence a slump is nearly 



90 STOCK PRICES 

always more necessitated by conditions, more independ- 
ent, that is, of the wishes of the great majority of buyers 
and sellers, than is a bulge. In a bulge nearly everyone 
interested is glad to see prices go up ; in a slump, save, 
possibly, sometimes in an active long-continued bear mar- 
ket — few like to see prices go down. In a day's slump, 
all that is necessary for prices to decline, is that the hold- 
ers of stocks should do nothing, and they will see the 
prices of their shares go down. Soon marginal holders 
begin to let go of their constantly weakening accounts 
and all they can do now is what they are forced to do — 
liquidate. Hence the reason that an active rising market 
may be the immediate precursor of a bear movement, but 
that a bull movement is preceded, not by activity with 
weakness, but dullness: the bear market is forced; the 
bull market is brought about by intentional participation, 
and, after a great fall neither financial circumstances nor 
sentiments are apt to permit of an instant reversal of the 
weight of the trading. 

Thus, at the top of an upward movement, whether it be 
an advance of a few days or of months, whether it be 
great or small, there are two classes — the bears and the 
profit takers — to retard the continuance of the advance. 
But in a declining market the profit takers — here, the 
successful short sellers — are, indeed, there, though few in 
number compared with the profit takers on a rise, because 
the short seller is rarer than the buyer for the rise ; but 
there is no class to correspond to the bears in an advanc- 
ing market, no class, in other words, to endeavor sys- 



RISING AND FALLING MARKETS gr 

tematically in a falling market to stop the fall and reverse 
its course as the bears in an advancing market endeavor 
to stop the advance and reverse the course of the bull 
movement. Once again, to the same point is the fact 
that the average room customer, who is a bull, usually 
takes small profits when he takes them at all. Usually he 
fidgets in-and-out of the market. But the professional 
short seller, when not a scalper, stays with the market (as 
of course, does the 'Svise" bull in his proper time) and 
lets his profits reasonably run. 

In a bull market the public repeat and re-repeat their 
commitments on the long side, but in a bear market 
after once closing out they do not, as a general rule, 
re-enter as buyers for some time thereafter. The pur- 
chases by the public in a bull market mark the beginning 
of a transaction which has to be closed by a sale unless 
the stock is taken out of the market, but the sales by the 
public in a bear market mean the end not only of that 
particular account, but usually of any account for some 
time to come. There are no large public purchases in a 
bear market to give it repeated upward thrusts. 

To put the whole matter in a nutshell, there is always 
a large reserve of prospective selling in a bull market 
which, as higher and higher prices are reached, tends 
to retard the speed of the movement ; but in a bear mar- 
ket the reserve of buying strength is much smaller in 
proportion to the extent of the price movement. 

From the foregoing we may draw a preliminary con- 



92 STOCK PRICES 

elusion that prices go up slower in a bull market than 
they go down in a bear market. 

If we take the great bear market of 1907 we shall find 
that railway stocks as measured by the average prices 
of twenty rails, fell 56 points net between December 11, 
1906, and November 21, 1907 — a total of 345 days, in- 
cluding Sundays and holidays. On the other hand, the 
bull market of 1908 and 1909, counting from February 
13, 1908, to August 17, 1909, rose 47 points net, as meas- 
ured by these averages, in 551 days. Thus, the twenty 
rails rose on an average .085 points a day in the bull 
market and fell on an average .160 points a day in the 
bear market — or about twice as rapidly. 

Or, if omitting swings of less than two points in either 
direction, we count up bull days and bear days in both 
markets, we find that in the bear market of 1907 there 
were 213 days of fall, totaling 92 points, and 132 days of 
rise, totaling 51 points. (The difference betw^een these 
figures is not the true net of 56 points on account of the 
omission of swings of less than two points.) On the 
other hand, in the bull market of 1908 and 1909 there 
were 432 days of rise, totaling 90 points, and 119 days 
of fall, totaling 42 points. Thus, as before, we arrive at 
about the same result, namely, that a rise in a bull mar- 
ket takes twice as long as a fall of an equal number of 
points in a bear market; or the average daily rise in a 
bull market is only half the average daily fall in a bear 
market. 

Daily slumps in a declining market are not the same 



RISING AXD FALLING MARKETS 93 

as bulges in an advancing market. Examine the day-to- 
day prices of some active stock during the bull move- 
ment of 1900 to 1901 or the advance from February, 
1908. With these courses of prices, compare those in 
1903 and 1907. In the bull markets, it will be found 
that the rises in price (the upward secondary move- 
ments), take up as a rule a much longer time for the 
same number of points advance than do the declines in 
the bear markets. That, indeed, in the bear markets, the 
decline goes on not so much by a continuous retrogres- 
sion as by a series of acute downward fits and starts. 
Both bull and bear markets may be marked by smart 
reactions ; but, here, too, the rally in the bear market, 
like its rapid precedent fall, is relatively quicker in the 
time of its occurrence than is the recession in the bull 
market after the precedent rise. When the downward 
movement in a bear market abates, prices, after the rally, 
fluctuate about the same points till a recurrence of selling 
pressure induces another break. 

Yet even the foregoing figures do not fully show the 
great diflference in rapidity of price movement in bull 
and bear markets. 

The upward progressions in prices in 1900 to 1901 and 
in 1908 to 1909 lasted for weeks and months continu- 
ously with a few reactions also of considerable duration 
but moderate in their extent. But, on the contrary, in 
1903 and in 1907, the great downward swings which gave 
the chafracter to the whole bear movement of each year, 
took place in very few days. The breaks on a few days 



94 STOCK PRICES 

in January, 1907, on March 14, March 25, August 7 and 
8, October 14 to 30 (but not on every day of this in- 
terval) make up nearly the whole bear market of 1907. 
There were declines at other times and a pessimistic 
feeling throughout the year (to say nothing of the facts 
outside the Exchange) which indicated that the down- 
ward forces were still in the ascendancy, but it was to 
these days that the real decline was very largely confined. 
It is worth adding that, as is evident from the above, a 
great volume of sales on any day is far more effective in 
a bear than in a bull market. Great record days on the 
Exchange are much more frequent in bull than in bear 
markets and much less important. It is worth adding, as 
a corollary to the above paragraphs, that a very great 
general fall may occur at once on the top of a great 
general rise, as in May, 1901, but that an advance so 
huge in the number of points could hardly, even as a 
rally, occur in a bear market ; for, if it did, it would mean 
that the entire market was practically cornered. 

If the rises in 1900 to 1901, in 1904 and in 1908 be con- 
sidered, it will be seen that in all three instances prices at 
the beginning, advanced very continuously and generally 
speaking, much more rapidly than later on. This indi- 
cates the willingness with which banking institutions 
financed the rise. But, from May, 1901 to August, 1902, 
from March, 1905, to November, 1906, and from August, 
1909, to March, 1910, the market, while, on the whole, 
showing an upward tendency, reflects a state of backing 
and filling in prices. 



RISING AND FALLING MARKETS 95 

The first two instances culminated in the bull uj>- 
shoots of August to September, 1902, and of August to 
October, 1906. During these long periods of backing and 
filling, the secondary swings which mark the reactions 
are almost as prolonged in the price-range as the second- 
ary swings which are a part of the great upward primary 
swing. Such a condition reflects the growth in the market 
of positive forces making for an opposite movement in 
prices. 

There are points in connection with market movements 
which deserve a word of explanation. One of these is 
the tenflency when a movement upwards or downwards 
has come to an end for the price, after reacting, to come 
back to the former high or low figure. Sometimes this 
happens more than once in succession. Such price move- 
ments are known as double tops or double bottoms and 
are often cited as affording evidence when they occur, of 
a cessation, for a time at least, of the movement. These 
double tops and double bottoms are easiest noted at the 
culmination of a long secondary price swing. In effect 
they represent the profit taking of those on the right side 
of the market. Their closing commitments account for 
the rally, after which prices deprived of further support 
or attack tend to sink back in a downward market, be- 
cause there is no more buying, but if the level has really 
been reached offerings are taken freely at the lowest 
prices. 

Another feature is what is called breaking through pre- 
vious high or low prices. After a rally in the course of a 



96 STOCK PRICES 

decline, if prices fall again and pass below the former low 
point, there is a good chance they will go still lower. Of 
course the reason is, that marginal holders, undis- 
turbed before, will be affected by the new decline which 
is commencing to weaken margins unimpaired before. On 
the other hand, in an upward movement, a further 
advance through the preceding high point denotes an 
accession of fresh buying power which is not exhausted 
by the mere breaking through, but will persist further. 
These facts form the basis of much chart trading. It is 
hardly necessary to say that it is easy enough to imagine 
situations where these signs might occur without being 
followed by such consequences. 

There are some practical consequences from the fore- 
going paragraphs which are worth indicating. One is 
that a few days' decline gives as much profit to a short 
seller as many days of rise to a bull. Again, in a declin- 
ing or vacillating market, while the day of a good fall 
may, at times, be safely called, it is less easy to do this in 
a bull market as regards a smart bulge. For, while it may 
be obvious that an advance is due or is actually in prog- 
ress, the day of an acute rise depends on the mental atti- 
tude of a host of more or less unknown participants and 
a number of pools whose intentions are seldom firmly re- 
vealed. On the other hand, the perception of the immi- 
nence, even if, not necessarily, of the exact day of, an 
acute fall means simply the knowledge that the market is 
honeycombed with weak accounts for the rise and that 
the buying impetus has ceased. The short sellers are 



RISING AND FALLING MARKETS ^ 

always present and may be relied on to seize the occa- 
sion. 

It all comes to what has been already said, that in a 
rise the mass of the speculators pecuniarily interested are, 
and must be, active ; in a fall they have only to 'be, and 
usually are compelled to be, passive, save when unwill- 
ingly forced to part with their commitments. A curious 
example of this state of things and of a forecast immedi- 
ately verified occurred after the late President McKinley's 
death. It will be recollected that on the news of his pass- 
ing away becoming public, the Exchange was ordered 
closed. On its reopening, a few days later, prices were 
at once bid up several points above the last closing. 
Large financial interests were holding up the market to 
avert a disturbance. After the opening, however, prices 
ceased to advance, and on a succeeding day, when the 
situation had become clarified, one of the best known 
financial dailies stated that the market was artificial and 
"a sale" — which prediction was, that same day, verified. 

It appears that the statement may be hazarded that 
when the right time seems to be present, either for a bull 
purchase or for a short sale, the percentage of safety is 
larger in the case of the sale when that is indicated than in 
the case of the purchase should the latter seem timely — 
for, at least, the likelihood of some profit. The data on 
which to call a fall being more explicit in the long run, 
there is a greater chance, on the theory of probabilities, 
of the commitment going the wished-for way. Again, a 
bear does not have to pay interest on his commitments 



9^ stock! prices 

and the loss of dividends on the stocks of which he is 
short is not of importance save for a very long pull — for 
a stock normally falls off the extent of the dividend when 
it sells ex-dividend. On the other hand, it is plain that a 
bear requires to watch the market closely as his increased 
percentage of success is based on his knowledge of cur- 
rent technical conditions and his capability, by its aid, of 
foretelling the sudden sharp falls. 

There are several points in connection with the activity 
of the public in the market which need attention. Almost 
invariably, shares bought by a haphazard speculator go 
up at least a little after his purchase, for the simple reason 
that he does not purchase except when prices are going 
up. But either he buys so near the top that the market 
shortly after starts to sink, or else, what amounts to the 
same thing, he takes a very small profit by selling his 
stock, and then waits till it or some other share has still 
further advanced in price when he re-purchases once 
more. Other speculators of about the same calibre will 
at once overtrade on finding themselves with a profit. 
The question thus arises. What is the market effect of the 
profit taking of these numerous speculators and of their 
still much more heavy losses? As long as the market is 
going upward, it is evident that the stock passes from 
hand to hand at advancing prices, while the former owner 
takes over some other shares a little later. Thus, the 
fact of such public gains as there are, exerts no influence 
on the market calling for separate discussion. But in 
the case of the public losses an interesting question arises : 



RISING AND FALLING MARKETS 99 

Why, if these shares have been generally bought by the 
public at somewhat lower prices, do not the losses at the 
top produce a fall corresponding to the rise above the 
rough figure at which the public entered ? The answer is, 
that, sometimes, they do produce some such fall, but that, 
where the fall is not nearly so large as might be thus 
looked for, a large part of the stock is either held by 
investors or is obstinately held onto by public owners 
despite its fall. More generally, though, it may be said 
that the prices reached at the top of a great advance 
represent the opinion of those qualified to judge of the 
upper limit of the values of shares. The prices at which 
the ''wise'' sell to the public are regarded by them not as 
grossly unfair but, usually, as about the highest possible 
from an investment standpoint. Stocks, then, simply 
react, after which they fluctuate at relatively narrow fig- 
ures compared to their range in the preceding rise. Such 
was the condition of things in the long period between 
May, 1901, and August, 1902. 



IX. 
The Distribution of Profit and Loss in the Market 

It is obvious that as long as stock prices move in one 
direction, those traders who go with the current may all 
gain and none of them lose. The shares pass from hand 
to hand at continuously advancing prices. But, if a stock 
be taken whose sharjes are selling say, at $ioo each, and 
the price be considered as advancing say, to $150, and 
then as falling back to the former figure of $100, the 
losses made in that stock during such an equal up-and- 
down movement will be exactly equal to the gains, al- 
though the profits of no one participant may be exactly 
equal to the gains of any other, and although in very few 
cases can one individual gain be balanced against another 
individual loss, as this would imply that two sales of the 
same amount of the same stock, first as a purchase on 
either side and then as sold, were made between two iden- 
tical speculators. But, that the sum, during such a period, 
of the gains must be just equal to the sum of the losses 
will become clearer if the holders who have the stock at 
the start be viewed as having acquired their shares at the 
prices first considered, and if the final holders (whether 
the same or not, in any case, as the former) be viewed as 
having sold when the price returned to the figure first 
considered. The proposition of the equality o^f the gains 

100 



PROFIT AND LOSS loi 

and losses then becomes almost self-evident; some of the 
profits and losses may, it is true, be on paper only, but 
they are instantly convertible, if wished or if necessitated, 
into cash. Thus, the popular conception that someone 
must always lose in stock speculation when another makes 
is true only in the case of an up-and-down movement. 
When a stock quotation has advanced above the price, in 
money or an equivalent, for which it was first issued by 
its corporation, the rise must have aflforded to the owners 
as a whole greater gains than losses, although the gain 
may have been to fewer individuals than the losses. This 
is true with regard to any price arbitrarily selected as a 
starting point, if the view be restricted to the gains and 
losses during the period of up-and-down movement con- 
sidered — that is, if gains and losses at the beginning of 
the period or any previously made, be ignored as irrele- 
vant. It thus becomes evident that the great appreciation 
in price of Exchange stocks since 1900 has been the 
source of very much greater gains than losses. 

To the distribution of loss and gain as caused by price 
movement, short selling superadds a feature of its own. 
This mode of trading is often likened to a contract for 
the future delivery of commodities — such as obtains in 
the grain markets. But this is not quite correct ; stock 
sold short must be delivered at once, not at some time in 
the future. It must, therefore, be borrowed for delivery. 
If the 'Mender" of the stock be regarded as disposing of 
his shares to the short seller with the proviso of a double 
"cair' on both side, it is easier to understand how thjs 



102 



STOCK PRICES 



method of trading affects the distribution of loss and gain 
in the market. The ''lender" may be considered to have a 
"call" on the same amount of stock if the price goes up, 



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and the short seller to have a "call" on the amount of 
money he deposited if the price goes down. That this is 



PROFIT AND LOSS 103 

a legitimate way of regarding the transaction will be 
evident by reflecting that the short seller need not sell 
short at all in order to borrow stock. To be sure, the 
borrowing by itself would be futile, as the same shares in 
the end would have to be returned to the 'lender." But 
the act is an economic whole which is actually possible 
by itself. The short seller makes what the **lender'' loses 
through the depreciation of his shares when returned to 
him, or he loses what the ''lender'' makes by getting back 
shares salable for more than the amount of the money 
deposited with him by the short seller. Two different 
certificates (or their equivalent) for the same number of 
shares are almost always involved in short selling — the 
one at the beginning borrowed from the ''lender'' and 
handed to the buyer of the short stock; and the one at 
the end bought in by the short seller and by him handed 
over to the "lender." But these two opening and closing 
transactions in which the certificates change hands (or at 
least are cleared) may be regarded as simply two sales. 
The easiest way, then, to understand the distribution of 
profit and loss occasioned by short selling is to regard it 
as an arrangement by which the profit which the "lender" 
would have made (by selling his stock at the higher 
price) goes to the short seller, or the loss which the 
"lender" would have incurred by letting his stock go at 
the lower price becomes the short seller's loss. Short 
selling, then, is a sort of an arrangement by which a profit 
or a loss on paper which, without its occurrence, would 
accrue to another trader (the "lender") is handed over 



104 



STOCK PRICES 



in cash to someone else (the short seller). The situation 
produced by short selling is not really complicated nor 
hard to understand, but the facts leading up to it have 
some involved features which necessitate rather close 
attention to perceive their full bearings. 



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Such being the mode in which profits and losses are 
distributed in the market, we have next to ask among 
whom is the actual distribution made and in what propor- 
tions. Here, as regards the first question, we may avail 



PROFIT AND LOSS 105 

ourselves of the analysis of 500 accounts made by Mr. 
Thomas Gibson and described in his 'Titfalls of Specula- 
tion/' These accounts were all in United States Steel 
common and represent commitments made between July, 
1901, and March, 1903. At the former date the stock 
price was 37 and the same price was touched at the later 
time. During the intervening period the stock price 
ranged between 29^ and 46^. Mr. Gibson's words 
follow : 

"Three hundred and forty-three accounts resulted 
in a net loss at their termination ; 88 accounts re- 
sulted in a net profit; 52 accounts were even or 
showed inconsiderable differences. The result of 17 
accounts is unknown, as the Steel stocks represented 
were taken up by the purchasers, in all cases at a 
considerable paper loss. 

''The total deficit on all losing accounts was, 
$1,245,000; the total gain on all profitable accounts, 
$288,000 ; leaving a net deficit of $957,000. 

*The total number of shares handled was 1,112,000. 
of which 820,000 shares were originally purchases, 
and 292,000 originally short sales. 

'The total brokerage charges, commissions, inter- 
est, etc., were $275,000, which amount is included in 
the total loss. 

*The comparative losses on short sales, share for 
share, were about 20% greater than the losses on 
purchases. 



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^•ft« i^'kil \>4ftr* ^r* May. Jun« July /Vug. SQpt*.Oct« Nov* Deo*, 



PROFIT AND LOSS 107 

"The favorite method of operation was to purchase 
or sell on slight reactions from high or low prices. 

*The average price of all purchases for long ac- 
count was 42^i and the average price of all short 
sales was 35^;f 
That 343 accounts showed losses to 88 showing gains, 
and that the gains were but 20^c of the net results is but 
a reiteration of the familiar fact of the ''public's" losses. 
Who the relatively few winners in stock speculation are 
has 'been incidentally noticed, several times, in the preced- 
ing chapters. But the losers seem to have changed in 
character since the famous boom of 1901. There is little 
question that then almost everyone of speculative ten- 
dencies and the wherewithal to trade who could reach a 
brokerage house or even a ''bucket shop" (of which there 
were then many) was interested in the rise that Spring. 
But, in recent years, trading has shown a tendency to be 
confined to the decidedly well-to-do members of the com- 
munity. Certainly, the losers on the Xew York Stock 
Exchange are not the oft-quoted "widows and orphans," 
etc. Indeed it seems hardly w^orth while repeating that 
very few Exchange houses will take speculative accounts 
of less than 100 shares which means a minimum margin 
of $1,000. Xo doubt, there is a considerable amount of 
trading on the Consolidated Exchange for the accounts of 
smaller speculators. But the transactions on this Exchange 
are on an average probably less than i in 10 compared 
with those on the "large board." To those who have had 
relations with brokerage firms in recent years there is 



io8 



STOCK PRICES 



little doubt of what is the true answer to the question 
concerning the identity of the losers in stock exchange 
speculation. They are the successful business men of the 



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jAn» Feb. Mar* Apr* lUy June July A^g. S^e^ Oct* Hov. Dec* 

community and their losses are the surplus gains, in whole 
or in part, from their own occupation. It is the wealthy 
or well-to-do annuitant from a trust or from his own cap- 



PROFIT AND LOSS 109 

ital, the successful attorney, real estate man, publishei^ 
merchant, doctor and other high-grade business or pro- 
fessional man, who comes regularly to Wall Street to dis- 
pose of his surplus money. Here, too, is a curious con- 
firmation of the fact mentioned in the third chapter, when 
referring to the priority of stock prices to the business 
situation. At the end of a long decline in stock prices, 
those who have let go of stocks are not in a position to 
enter the market for some time, even when assisted by 
the banks. But when business picks up, large surplus 
balances ready for speculation again appear. Meanwhile 
stock prices have been advancing through the foresight of 
the "wise" assisted by the resources of the banks. It is 
the old story of the reapers being ready just when the 
harvest is ripe. 

It might be interesting to enquire just what proportion 
speculators successful in the long run bear to those un- 
successful. No doubt the number would vary from year 
to year, but even for a rough approximation to the facts 
the data do not seem to be present. On Mr. Gibson's 500 
accounts, the loss of $682,000 ($957,000 less the commis- 
sions, etc., of $275,000) on transactions in 1,112,000 
shares comes to but a trifle over 50 cents a share. This 
would give an average loss of about $1,300 to each specu- 
lator. In this analysis the number of shares traded in by 
the 343 unsuccessful speculators is not given, so that art 
exacter result cannot be figured out. An investigation of 
a large firm's books would exhibit interesting facts in 
connection with this matter and would, also, show how 



no 



STOCK PRICES 



the average percentage of loss on each losing commit- 
ment compares with the average percentage of gain on 
each winning account. The ratio would at once furnish a 
good inference as regards the size of the average winning 
commitment compared with the average losing commit- 
ment. In the absence of such assistance we are restricted 



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Jaru. Feb. War* Apr. May June July Ajis. Sept.* Oct. Nov. Dec* 



to a consideration of what percentage of profits is ob- 
tained in the market by the winners. 

In considering this question it should be noticed, first of 
all, that in all business the profit increases as the risk 
grows. This is true even of the mere investment bond- 
holder. From Government bonds returning 3% or less 



PROFIT AND LOSS in 

on the investment down to the lowest grade of preferred 
shares returning 7, 8 and 9% on the investment, there is 
a steady increase in the return as the risk grows. Look- 
ing at the matter a Httle closer, it will be found that, not 
only actual security but prestige, has much to do with the 
net return afforded by stock and bonds. Also, that a 
lesser speculative importance not infrequently keeps the 
prices of a security below the figures at which, in consid- 
eration of the financial strength and commercial prestige 
of the corporation, they might be expected to sell. 

When, from corporations whose shares are listed on an 
exchange, we turn to trading companies the percentage of 
profits is found to have risen immensely. The causes 
back of this difference have already been discussed. Firms 
which have a capital of $500 to $5,000 make, as a rule, 
between 50% for the barely existing to 150% and 200% 
for the successful. Indeed, it is obvious that this percent- 
age is indispensable to cover the living expenses of their 
owners. Retail druggists, grocers and other small mer- 
chants net yearly profits which probably fluctuate between 
100% and 150%. 

Now, of all businesses, that of stock speculation is most 
hazardous. It might therefore be expected that those 
successful in it would demand profits of large magnitude. 
Before attempting to decide what profits are, in fact, 
actually made by those on the right side of the market, 
year in and year out, the writer from experience and 
observation decided, simply as a conjecture, that 30 points 
profit a year was, on the average, about as much as could 



112 STOCK PRICES 

be hoped for. How far this guess agrees with the results 
of the analysis will immediately appear. 

The five diagrams given with this chapter show the 
average fluctuations of twenty railroad stocks listed on 
the New York Stock Exchange, in the years 1905 to 1909, 
inclusive. The data for these diagrams were obtained 
from the Massachusetts Publishing Company, but the 
diagrams are constructed on a slightly different principle 
from that generally made use of, as will be explained 
below. 

In constructing the charts the fluctuations of the sama 
stocks were used as those employed in the diagrams in 
Chapters IV and V. These stocks are: Atchison, Balti- 
more and Ohio, Brooklyn Rapid Transit, Canadian Pa- 
cific, Delaware and Hudson, Erie, Illinois Central, Louis- 
ville and Nashville, Metropolitan Street Railway, Mis- 
souri Pacific, New York Central, Norfolk and Western, 
Northern Pacific, Northwestern, Pennsylvania, Reading, 
Southern Pacific, Southern Railway, St. Paul, Union 
Pacific. The charts do not show all the movements but 
simply those, usually over three points — reasonably avail- 
able for speculative purposes. Smaller variations have 
been noted in a few instances where their omission would 
give a misleading appearance to the market in any month. 

In 1905, it is certain that a man conversant with the 
market would still be on the bull side which had been in 
the ascendant since the latter part of 1903. We may 
assume he would be on his watch for the top but well 
aware that this is a matter, in a long swing, not of weeks 



PROFIT AND LOSS 113 

but, often, of many months of backing and filling con- 
sumed in the secondary and still smaller swings. If we 
examine the diagram for this year it may be assumed that 
the successful speculator was long from February till 
March for a profit of 9^ points. On the principle that it 
is unwise to be short in a bull market he might refrain 
from selling short in March, when the insurance scandals 
and some other financial quarrels came to a head. Let us 
assume the speculator long again in May till August for 
17 points profit. As a fall in stock prices in Autumn is 
almost regular on the Exchange, owing to the demand for 
funds for crop moving, he might go short in the last 
named month. Again the very bad money market in 
November might have led him to take the short side 
again. In December, in the face of the strength in stocks 
with very high money rates, he might have stayed out of 
the market. The two falls in August and November 
would give ten points more to his credit, or 36^ points in 
all for the year. But against this gain there are some 
technical factors to be taken into account. A speculator 
seldom strikes the exact top or bottom of a movement, he 
loses on interest charges when long and on accruing divi- 
dends when short. Moreover, errors at the opening and 
closing of accounts, necessitating small losses, are to be 
reckoned with. If then, we throw ofif three points from 
each commitment we shall be more conservative. In this 
way we arrive at 26^ points profit for the year. This is 
hardly too high in the case of the speculators who were 
actually successful that year, because the trader might not 



114 STOCK PRICES 

unreasonably have done even better. He might have gone 
short at the beginning of the troubles in the Spring and 
have risked being long in the market in December in view 
of the assurances of big interests that it would not be 
suffered to fall. On the other hand, had he adopted the 
first of these courses, he might have 1>een mistaken about 
the rise in May, for it is a difficult matter to change 
from the bull to the bear side or vice versa, and keep one's 
head clear. 

In 1906, we may reasonably assume that our speculator 
a&w what was apparent to almost all experienced observ- 
ers, namely, that the market, in any event for the time 
being, was near its top. He would have been likely, con- 
sequently, to be short in the latter part of January. If he 
covered in May he would get 17^ points profit. If he 
stayed out of the market on the ensuing rise and again 
went short in June, another 9^ points profit would be to 
his credit. On the recovery in July he could hardly have 
failed to see that something very unusual was brewing, 
and if he had some sources of good information, as is 
usual with those successful, he would have seen good 
reason to be long of Union Pacific. Indeed the market 
action of the stock almost called aloud for participation. 
But confining his commitments to the average stock in 
which we are imagining him as dealing, we may allow 
him 15 points profit. In October and again in December 
he is short, making 13^ points. Aggregating the win- 
nings on these five commitments, we have 55 points and 
throwing off 3 points as before on ^ach commitment, we 



PROFIT AND LOSS 115 

reach 40 points profit for the year. Probably, this amount 
is still too high, as both 1906 and the preceding year, with 
their backing and filling, made difficult markets to deal in. 

In 1907, an examination of the chart for that year will 
render it evident that a speculator might have fairly ex- 
pected a profit of 50 to 60 points. In 1908, if we assume 
that the speculator was long, after February, the whole 
year, we may credit him fairly with 30 points. The two 
opening months presented a less obvious course of action. 
On the whole, however, 1908, like 1907, was a much less 
difficult year to trade in than either 1905 or 1906. Nearly 
all well informed observers anticipated a decline of mag- 
nitude in 1907 and a rise proportioned to the great 1907 
fall which actually occurred, in 1908; 1909 was evidently 
a difficult trading year, due to the sharp February fall and 
the uncertainty of the market after August. Hardly more 
than from 15 to 25 points profit can be allowed, except to 
those actually in the forefront of market events. 

It may be objected to the foregoing analysis that it is 
based on average movements, while, actually, trading is 
done in certain definite stocks. But, it must be remem- 
bered that a speculator usually deals in several stocks and 
that this method gives the easiest way of an approxima- 
tion to his net results. Moreover, while the higher priced 
a stock, the more rapid is its fluctuation, the greater, also, 
is the risk, and the greater the margin required. The 
estimates given may be taken as fairly representative of 
the results of successful dealings in the years considered, 
in stocks selling at not so far from par. It may be added 



ii6 STOCK PRICES 

that the fact that a trader in high priced securities (such 
as Great Northern preferred in 1905 and 1906), may 
make more points profit does not imply that he is making 
a larger cash gain. The necessity of holding in reserve a 
much larger margin may reduce his profits. 

It seems worth while to throw into percentage form the 
foregoing results of successful trading. For speculating 
in a stock selling near par, a trader will probably want 
an available margin of, say, at least 25 points, of which 
10 may be in the hands of his broker. If a speculator is 
dealing in 100 share lots, his capital would thus be $2,500 
as a minimum; if in 500 share lots, $12,500, and if in 
1,000 share lots $25,000. Taking the first case, that of the 
trader in 100 share lots, let us see what percentage profit 
is indicated in each of these five years. In 1905 he would 
have made about 25 points on his capital, or 100% profits ; 
in 1906, possibly 40 points, or about 160% ; in 1907, 55 
points, or 220% ; in 1908, 30 points, or 120% ; while, 
finally, in 1909, if we allow him 20 points, his profits 
would be $2,000, or 80%. If a more conservative total 
capital of the equivalent, say, of 30 to 40 points, be kept 
back of the trades, the percentage of profit would be 
correspondingly reduced. No definite average can be 
given, even in the roughest fashion. Some wealthy trad- 
ers take very large risks, while others are always in a 
position to buy outright every share they deal in, 



X. 
The Psychology of Speculation 

What temperament a successful speculator should 
have, what knowledge and what resources, are matters 
which have been much discussed. As a matter of fact, 
traders with a large knowledge of finance and the stock 
market, both win and lose. So, too, as regards tempera- 
ment: the nervous man and the phlegmatic; the hopeful 
and the pessimistic; all may make and lose. The ques- 
tions of knowledge and temperam.ent do not quite get to 
the core of the matter. Here, the subject arises only as 
illustrating how^ prices are actually made by those whose 
action is dominant in the market. 

Ignorance, over-speculation and carelessness have been 
assigned as the chief causes of speculative loss. But the 
whole gist of the matter seems to lie in the fact that the 
attitude, as a rule, of those on the losing side of the mar- 
ket, is hopelessly wrong. It is doubtful if there is a cus- 
tomers' room manager who, at times at least, has not 
been literally astounded at the manner in which successful 
business men, often of the closest-grained sort, throw 
away their money at the suggestion of irresponsible tips 
and chatter. The usual commission house customer, pop- 
ping in and out of the market at every rumor, reminds one 
of nothing so much, as an English writer puts it, as of 
those flies about a piece of beef disturbed by the butcher 

117 



n8 STOCK PRICES 

boy's approach. The ignorance, the over-speculation and 
the carelessness of such customers are often the plainest 
sort of facts, but they are not the bottom of the trouble. 
The futile and fatuous commitments of men who in their 
own business readily amass thousands are not to be dis- 
missed with so easy an explanation. At bottom, the aver- 
age customer of a commission house does not regard 
speculation as a possible business in any sense of the 
word. He regards it as a gamble — a word, by the way> 
which he is very prone to use, and which more than any- 
thing else as brief, explains the character of his commit- 
ments. That stock speculation is a matter wholly useless 
to study, is another oft-heard remark of the same tenor. 

But the fact that so very few traders take the trouble 
to attempt to deal in the market as with a business propo- 
sition, leads to the likelihood that, to many men, this 
is literally impossible. The simple operation of 
short selling is explainable with extreme difficulty to 
most commission house customers, often those of years' 
standing — 3. proof, not of mental obtuseness but that the 
most elementary stock market operations belong to a 
class of dealings which their commercial training has 
left wholly alien to them. 

Two matters thus arise for discussion in connection with 
successful speculation. What experience does it normal- 
ly imply? and, What is the attitude actually taken to- 
wards their commitments by those right in the market? 

In all trades and studies, experience supplies the abil- 
ity to discern the practical bearings of one's knowledge 



PSYCHOLOGY OF SPECULATION 119 

and to act at once on this discernment. Without experi- 
ence there is wanting the faciHty to carry easily into 
practice the theory illustrating the matter in hand. The 
French have a maxim, *'One can't think of everything/' 
and it is just because he cannot think of every detail 
and of how to meet it on the instant when it should be 
thought of and met, that the speculator without experi- 
ence is necessarily left in the lurch, no matter how gifted 
naturally he may be. Observation of what should be 
seen and execution of w^hat should be done, come, 
through many repetitions, to be almost a reflex physical 
act to the experienced trader. No matter how phleg- 
matic and thoughtful an operator he be, one lacking ex- 
perience will almost certainly, in a difficult position, lose 
his head to the extent, at least, that he will not be able 
to apprehend and to carry out at the time the line of 
action which his own afterthought may readily show 
him to be the right one. It is true that, without the in- 
nate capacity of being trained to this rapid decision and 
action, no man is likely to succeed in speculation. But 
the training is just as necessary as the capacity, and with- 
out the former successes can be regarded only as mere 
windfalls of luck, sure to be reversed in the end when 
difficult days come. 

The value of experience in the market has been neg- 
lected, because it is evident that the only w^ay to get 
this sort of experience is to pay for it in the market it- 
self; and those who, with considerable capital, start to 
acquire it this way are likely to desist, owing to the im- 



120 STOCK PRICES 

possibility of paying further. Small commitments dur- 
ing the time of one's early trading might be suggested, 
but, however acquired, the experience must be attained. 
It only remains to be added that it is not to be acquired 
on paper. No one can learn to speculate simply by watch- 
ing the market, because no one acts the same when he 
has put up a real, and when only an imaginary stake. 

If, now, we turn to the mental attitude of the specu- 
lator on the right side of the market, in each and every 
case not assisted by sheer luck, it will be found to be, 
what that of those on the wrong side is but nominally — 
a true ''speculation." Really to speculate for a rise means 
to buy now because in the future prices are expected to 
be higher; and prices in the future are expected to be 
thus, because conditions then, not now, will warrant 
higher prices. But, it is merely an expansion of what 
has gone before, to insist on the point that the average 
speculator buys "because conditions now are good. "Busi- 
nees looks great; stocks can't help going up,'* is one of 
the most frequently heard remarks of a general sort in 
the average customers' room. But, on the contrary, the 
truth is, that, if business now looks great, the prices have 
already advanced to meet this "greatness" — have "dis- 
counted it." Stocks do not go up only because business 
is now "great," though they may stand still on that ac- 
count, and may often, as shown previously, go down 
while this state persists in its entirety. If an advance 
in stocks is "backed" by the experienced, it is not at all on 
the bare fact that, say, railroad earnings are now very 
large, but because it is believed that they will be still 



PSYCHOLOGY OF SPECULATION 121 

larger in the future. The knowledge which the success- 
ful trader seeks is that of the condition of things (as far 
as attainable) months ahead. That of things at present 
simply give him a point of comparison from which to 
shape his view. 

If we turn to the right mental attitude at the opening 
of an account, it might be said that this means a vivid 
and exact imaging of what is expected to happen and of 
what is expected not to happen. A speculator believes 
Atchison will advance in price. Why? It may be be- 
cause of special facts connected with the Atchison 
finances ; or, it may be because of a bettering business 
situation; or, because of a good technical market situa- 
tion ; or, because two or more of these facts may concur. 
Again, a complete comprehension of the situation in- 
volves a clear idea of when the shares are expected to 
change in price. If a speculator thinks Atchison will 
advance in price shortly, without information as to just 
how soon, his grasp of the situation is very different 
from what it would be did he think the price would ad- 
vance at once; and, if, in either case, it did not advance 
at once. In the former case, he has made no error in 
judgment; but, in the latter, either his forecast was wrong 
throughout, or events which he failed to appraise rightly, 
operated against the causes on which he had relied for 
the fulfilment of his views. 

A definite image of the unfavorable contingencies be- 
lieved to be exckided from the situation is Hkely to be 
formed by those marketwise. For, if such contingencies, 



122 STOCK PRICES 

contrary to one's opinion, eventuate, it is a sure sign of 
erroneous thinking or of a lack of data on which to go. 
In the latter case, the trader habitually on the right side 
of the market, if he opens a commitment, will do so 
with the clear consciousness that his act is here a gamble. 
To see clearly the odds against one is a capacity hardly 
to be found lacking among the successful. 

It is legitimate for a speculator to test the market if 
he clearly realizes that he is doing so. He may feel sure 
of a rise but uncertain of the time of its beginning and 
may not want to run the risk of missing it. A forecast, 
in a quiet market, that a rise is due in a month or two 
may be inadequate, even if true. Something may turn 
up in a month to abort the situation. But the idea that 
a rise is due, either in a month or two, or else 
now, calls for the further consideration as to what 
circumstances may occur which will show the speculator 
he was mistaken. Futile efforts to boom the market, 
liquidation, signs of trouble ahead, may be some of these 
circumstances ; and the trader who buys on the situation 
as it stands, with no clear idea of just when it will change 
as he forecasts that it will change, may carry with him 
the intent to alter the direction of his commitment should 
the situation change before the prices do. He may get 
out if things become merely doubtful, go short if things 
become plainly black. 

The mere number of successful commitments is no test 
of speculative ability. A loss on a poor commitment may 
be as large as the gain on five or ten good commitments 



PSYCHOLOGY OF SPECULATIOX 123 

(as a matter of fact, something of this sort very often 
happens). The amount of money made is, of course, 
the decisive test of ability in the long run, but not nec- 
essarily in a short run. The gains may be due, partially 
or wholly, to luck. The test soonest applicable is the 
percentage of the number of times the speculator suc- 
ceeds because what he forecast would happen, does hap- 
pen: and what he forecast would not happen, does not 
happen. 

The foregoing paragraph may throw some light on a 
statement attributed to ^Ir. James R. Keene, that he has 
been successful but four times out of seven. If Mr. 
Keene ever made this remark, it is to be hoped his con- 
versation threw some light on what he meant by it ; for, 
as it stands, it is not perspicuous. If it means that out 
of the wealth adventured by him his gains have been 
to his losses as four to three, it may or may not be true, 
but, in either case, it is here irrelevant. But, if it means 
that out of an average of seven commitments, he has 
won four, there are successful speculators, especially 
those who often take small losses, who win much less 
frequently, and unsuccessful ones who have won much 
more frequently. The number of commitments won or 
lost is, by itself, no more necessarily a test of success 
than it is of ability. 

When do successful traders close accounts? When 
do they take profits? A good deal depends on whether 
the price-change is due to general or to special causes. 
In the case of a stock merely moving upwards in price. 



124 STOCK PRICES 

along with the general stream of quotations, the question 
is, to determine when the stream stops flowing in an 
upward direction. In the case of a stock in which there 
is also manipulative control, it may be possible to obtain 
some idea of the price to which the pool intends to put 
the shares ; if not, it may be stated generally, that where 
a stock sells clearly above its investment worth, it is time 
to think of closing the commitment. In regard to this, as 
to the other details of the market, it may be added that 
the trader fitted for the business does not, ordinarily, 
reflect on this or that rule or principle. Taking a survey 
of the whole matter, he sees at once the bearings of each 
fact, and trained, as he is, by previous experience and 
thought, perceives and takes the proper course of action. 



NOV 13 1911 



One copy del. to Cat. Div. 
^ HO.' 



